We all know that to make money with our investments we should “Buy Low and Sell High”. Unfortunately, despite our best intentions our human nature gets in the way. An investment drops so we sell it. We scan the papers for the funds and stocks with the highest returns and rush to buy them, often at their peak. The record mutual fund sales in the late '90s and the flood of redemptions from 2000-2002 are prime examples.

So, how can we stop our emotions from getting in the way of smart investment decisions? It's easier than you think. Taking advantage of a simple strategy called rebalancing will help you both boost your investment returns, and reduce your risk.

Over the course of a year, some of your investments may have increased in value, while others may have dropped. Or, they may have all increased or dropped but at different rates. At the end of the year, your portfolio mix will likely be different than the mix you started out with, sometimes dramatically so. Rebalancing simply means periodically returning your portfolio to its original investment mix. When you rebalance, you ensure that your portfolio reflects the allocation you initially chose when you made your investment plan.

Why Rebalance?
By allowing assets to drift above or below their target range, you may be exposing yourself to more risk than you are comfortable with. To take a simple example, assume that three years ago you invested $5,000 in a portfolio of 50% bond funds and 50% equity funds. The equity portion had a return of 10% each year while the bond component lost 4% each year. Today, your portfolio would consist of 60% equities, and 40% bonds.

This is where emotion rears its ugly head. Why would you want to sell some of the equities when they are doing so well? The temptation is to keep the winners. However, as we've all seen, markets are cyclical, and yesterday's winner can be today's loser. In our example, your portfolio would have a higher portion of equities than you were originally comfortable with and may exceed your risk tolerance. If there was a sudden downturn in equities, a greater portion of your portfolio would be exposed to losses. On the other hand, if you had rebalanced each year, you would have locked in the equity gains and invested in the bond funds at lower prices.

Rebalancing your portfolio regularly (at least annually) is a foolproof way to make sure that you buy low and sell high. If you would like to review your portfolio and set up a system of regular rebalancing, give us a call or send us an e-mail. We'd be happy to discuss it with you.

Yours truly,

Tactical Asset Management, Inc.
phone: (306) 757-2121
fax: (306) 347-3655
e-mail: inquiry@tacticalassetmgmt.com
website: www.tacticalassetmgmt.com