Time to Rebalance Your Portfolio

It appears as though after a huge cramping in the economy that we are beginning to see the signs of recovery. Many of the leading economic indicators including existing home sales, pending home sales, manufacturing and non-manufacturing indices, credit stress, exports, personal consumption, inventory levels, capital expenditures, capital commitments, order backlogs, market volatility just to name a few are showing signs of a stabilizing economy. And although unemployment continues to climb and will likely continue to do so for several more quarters, those numbers are lagging indicators. So at this point investor concerns have shifted from can the economy stabilize to when the economy will stabilize.

With that, stocks have certainly performed in line with the expectation of a recovery. In fact the market has bounced significantly off its early March lows to reach levels we have not seen in eight or nine months. And as we know, the market rewards those who take the risk. So if you were too concerned to ride through this significant downturn and have moved your investments to cash, it’s important to start thinking about the long-term again. Most savings and money market funds are paying next to nothing and certificate of deposit rates are about 1% for 12 months. The only goal that these types of investment will meet over the long-term is peace of mind. And that may be okay if that’s your primary goal. However, if your long-term goal is to grow your investments over time then you will strongly need to consider getting your feet back in the water with stocks and/or other growth investments.

However, if you are interested in the potential growth an equity (stock) fund can provide but remain concerned about recent stock market instability, then a balanced strategy may fit your needs. This can be done by balancing your investments between growth stocks and bonds or other income producing assets which generally provide downside protection.

But don’t invest too quickly. With the recent upswing in stocks you may be tempted to jump in with both feet. However, be cautious. There are still concerns that linger in the economy which I’ll review in next month’s column – ie. government spending, inflation, unemployment, etc. Therefore it is still wise to hold short-term investments such as cash, bonds and certificates of deposit to meet short to intermediate term needs. Investing in stocks should always be done with a minimum investment period of 5-7 years and beyond in mind. That gives the investment time to recover in the event of a correction. So if you’re looking at putting longer-term monies back to work, dollar-cost-average into stocks over 3 – 6 months. That means putting a fixed dollar amount to work each month every month for a fixed period. That way you will buy more shares when the prices are lower and less shares when the prices are higher. This reduces the risk of investing a lump sum at higher prices resulting in immediate losses. It also helps take the emotion out of determining when to buy. We feel better when stocks are high and worse when they are low thereby making investors want to buy high and sell low. It’s critical to overcome that temptation in an attempt to buy more when prices are low and less when they are high. We certainly wouldn’t wait for prices to go up at the mall or the gas pump to buy and the same goes for investing.

The bottom line is most people saving for retirement or a child’s education need the potential growth, if at least to outpace inflation. So if it meets your pillow test (strategy that allows you to sleep at night) and helps you meet your long-term goals, now is the time to consider rebalancing your investment portfolio.