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SELL IN MAY & GO AWAY (Part 2)
talessi@ariesfoundation.org
LETTING GO OF A GOOD THING
EVERYBODY LOVES A WINNER
Sometimes having a little too much, especially when it comes to investments isn't always a good thing. We tend to want to stick with something that is doing well, but is that a suitable approach?
Just like about anything else that you deal with, can it be detrimental to have too much of a good thing? The answer is usually a resounding YES!
And while this may seem counterintuitive (though just think about having excess wine or desserts), over time the preformance of a particular asset can shift a portfolios intent -and its risk profile. There is a funky term for this; "Risk Creep", and it happens when a portfolio has its risk profile shift over time.
DECIDING WHEN TO ALLOCATE INVESTMENTS
There are several factors at play in this; time horizon of the holding, risk tolerance, and specific goal. Next, the individual holdings are selected that pursue the overall objective. If each of them had the same hypothetical return, that balance - "allocation" - would remain steady for a period of time. But as we discussed in our last blog, that's generally not how it works, and over time the portfolio bears little resemblence to the original strategy. Rebalancing is the process of restoring the portfolio to its original risk profile. Remember, asset allocation is an approach to help manage investment risk.
TWO WAYS TO REBALANCE
Method #1 - Use New Money.
If there is on-going contributions to your account, like a 401(k), then consider using the new money that is being added to purchase the holding(s) that are underperforming. Ex: Let's say your Bond allocation has dropped from 40% down to 30% of your total portfolio. You would then direct new money going in to purchase more of the Bond position(s) to increase its portion back up to 40% of the total allocation.
Method #2 - Sell The Winners
(when to let go). In this scenario you are selling a portion of the holdings that have outperformed expectation and using the proceeds to buy the underperforming asset(s). As we pointed out in Part 1 of this blog posting when you complete this transaction you are ironically "Selling high & buying low".
Tax Note: If you are doing this with a non-retirement account then there could be potential tax consequences involved. At the ARIES Foundation we always strongly suggest that if you hve questions on any subject, especially taxes, that you seek out the help of a professional before making any decisions.
Peridoically rebalancing your portfolio is a strong investment decison regardless of makret conditions. One suggestions is to pick at least one day of the year to schedule a time to review your allocation; Your Birthday, Your Anniversary (so you remember it), then make the determination as to whether or not any changes should be made.
GOT QUESTIONS? ASK US. WE CAN HELP WITH THAT!
Shoot us an email at info@ariesfoundation.org
and we are happy to try and help. Or you can visit our website www.ariesfoundation,org
to learn more
7 Smart Shopping Tips for Black Friday
Completing these financial tasks before year-end can help set you up for financial success in the New Year.
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And You're Not Alone!
The S&P 500 returned 26.34% last year
Now It Looks Like No Landing At All...
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T he projection was to spend a record 12.2 Billion (that's a lot of candy...)
Hey, Mr. (Fed) DJ - Can you play something else for a change?
