Carrie Schwab Pomerantz

Dear Carrie: I'm not an active trader. So a few years back (I'm 53 now), I built a retirement portfolio using ETFs and index funds. I haven't changed anything since, and in the meantime, I've gotten divorced and my son has headed off to college. I've also got a regular brokerage account, mostly index funds and ETFs. One of my 2012 resolutions is to re-examine my financial picture, but what am I looking for? What should I be thinking of? --A Reader

Dear Reader: Your resolution is, so to speak, right on the money. Whether you're a buy-and-hold investor or an active trader, taking a regular, objective look at your portfolio and your investment strategy is a great idea -- at least once a year or whenever a major life change occurs. While you're at it, make sure the other components of your financial life are in order, too.

With respect to your portfolio, everything starts with asset allocation: the mix of investments -- stocks, bonds and cash -- that fits your time horizon, your investment objectives and your tolerance for risk. Much of the time, you'll simply need to rebalance to bring the percentages back in line with your target; sometimes, you'll want to make directional changes and reallocate.


Let's say you constructed your retirement portfolio so that you had a fairly typical allocation for a 50-year-old, something like 60 percent in stocks, 35 percent in bonds and 5 percent in cash. But now you realize that the equity portion has declined, so much so that it now represents only 50 percent of your assets, while the fixed income portion has grown to about 45 percent of your portfolio, and the percentage of cash has remained the same.

It's nice that your bonds have increased in value, but with less invested in stocks, you don't have the same potential for growth. To get back on track you should sell some bonds and buy more stocks. One reasonable rule of thumb: Rebalance whenever one of your target percentages changes by five percent or more. Although nothing can provide absolute protection against losses or guarantee that you will meet your goals, rebalancing is an important part of staying on track.


Sometimes, however, a change in your circumstances could necessitate a more fundamental change. If rebalancing is akin to home maintenance, reallocating is like a remodel.

If you're within a few years of retirement, for example, you might want to reduce your exposure to stocks. Or imagine someone who is retiring this year and will be dependent on his or her retirement portfolio for income -- that could well involve an even more extensive shift.


Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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