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Time to sell some investments?

By Sheyna Steiner · Bankrate.com
Monday, March 11, 2013
Posted: 2 pm ET

Last week's employment report added more fuel to the stock market's fire. Last Thursday, Standard & Poor's 500 index was up 8.28 percent since the end of 2012. It jumped another 0.45 percent on Friday, following the better-than-expected employment news.

With the market up and spring just around the corner, maybe it's time to look at the old retirement portfolio for some rebalancing.

Bob Stammers, director of investor education at the CFA Institute, frames it as spring cleaning for your portfolio.

"It's important that investors think about rebalancing their portfolio when it makes sense to do so. Really it is more about getting investors used to taking responsibility for their investments. A lot of people take a set-it-and-forget-it approach with their portfolio, which can be as problematic as someone who is constantly tweaking it," he says.

Rebalancing involves checking your asset allocation and selling investments that have done well and buying more of your investments that have lost money. The amount of money allocated to each broad asset class determines how much risk you want in your portfolio. For instance, one person may feel safer with a portfolio split evenly between stocks and bonds. If the stock market does particularly well one year, that allocation could get skewed in favor of stocks, which increases the amount of market risk that investor is taking.

You can rebalance on a calendar schedule -- for instance, checking your asset allocation two or three times a year. Or you could do it after big stock market moves. For instance, if your asset allocation has drifted more than 10 percent, it may be time to pare back some winners and buy more of the losers.

"If you don't do it regularly, two years from now instead of 40 percent in equities, you may be 70 percent in equities and taking a lot more risk than you intended," says Stammers. "So if there is a big market correction, you're going to have a significant loss of assets, which is not what you wanted to do initially. But by not looking at your portfolio, you've put yourself in that position."

It's difficult to sell the portion of your portfolio that has been doing particularly well while buying up positions that may be temporarily floundering, but that is what needs to be done to keep risk down and your peace of mind up.

How often do you rebalance? I like to think about it after the market has gone up because it forces me to follow one of the cardinal rules of investing: Buy low and sell high.

Follow me on Twitter: @SheynaSteiner.

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Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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3 Comments
Random Guy
March 14, 2013 at 4:48 pm

Why on Earth would you sell winners and buy more of the losers!!!????? This is totally backwards thinking and a recipe for terrible returns. Also, why on Earth would you rebalance based on a calendar year? The market doesn't know what day it is, so this makes no logic at all. Want some real returns with minimum risk...try relative strength investing. Do what the market tells you and you will reap rewards.