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Adjustments

REBALANCING

Over time the relative size of the investment positions may change. If commodity prices rise signifigantly the real assets category will grow in relation to the other categeories. A fundamental tenet of asset allocation is the readjustment (rebalancing) of the portfolio on a periodic basis to bring the allocations back to the original targets.

The intent is to sell assets at relative highs and buy cheaper assets with the proceeds. To take the emotion out of the process the rebalancing should be done on a fixed schedule using a fixed process.

It is only necessary to rebalance once per year. If you love trading then rebalance more frequently. The results over time may be better with less frequent rebalancing because there will be less transaction cost and tax drag on the portfolio. Also, less frequent rebalancing can be viewed as "letting the winners ride" to get the benefit of the better performing asset classes.

Set a target for the amount of deviation from the target allocation percentages allowed before a rebalance is indicated. A value of 10% is a good starting place.

 

AGE ADJUSTMENTS

The amount of risk one should take with their investments depends on many factors. If you have 20 years before retirement, are employed and have one year of savings in the bank a higher risk profile is acceptable. If you are in or near retirement, lower risk is warranted. This is also true if you are just building your asset base and can't afford losses.

To tweak the risk profile of the portfolio, start with the target allocation at the bottom of page.

To lower risk, favor cash and bonds over equities and real assets. If you are not comfortable with doing the analysis required to determine how much risk is appropriate, see a financial advisor.

There are alternatives to the detailed approach described in the previous sections. Here is a brief review.