Time to Rebalance Portfolio? Stick to a Long-Range Plan

The key to ensuring a successful retirement or investment plan can be summed up in two words, says financial expert Frank Campanale: asset allocation.

Translated, that means dividing up your financial holdings between different classes of investments, such as stocks, bonds, and cash. The concept is timely, since the soaring stock market has set some portfolios out of balance with people's investment plans.

"Whether a person has $1,000 or 100 times that amount," an investment plan must be designed to reach long-range objectives, says Mr. Campanale, who heads a consulting subsidiary of Smith Barney in Wilmington, Del., that manages $90 billion in assets. The objective may be to buy a home, pay for college education, or ensure a comfortable income during retirement.

You should evaluate your plan yearly, Campanale says. If returns fall short one year, you may want to shift assets to obtain higher returns the next year. (Another option is to save more money to invest.)

Conversely, when stocks jump, you may want to shift money from stocks into bonds to "rebalance" your portfolio.

Traditionally, financial advisers have recommended 60 percent stocks, 40 percent bonds as the standard portfolio model. But today, most planners recognize that there is more than one type of investor.

A long-range plan should be tailored for each individual, says Tom Hoffman, director of research at the Managers Funds, a mutual-fund family in Norwalk, Conn. Details will depend on your objectives and tolerance for risk. Remember that while stocks and bonds bear the risk of up-and-down price swings, cash in a money-market fund has risk, too: It may perform little better than inflation.

Many experts recommend keeping at least some cash in case of emergency - enough to live on for three to six months.

In buying stocks, "a person should not try to time the market," Mr. Hoffman suggests. Rather, when the market gyrates sharply - as with a big rise or a downward correction of 10 percent or more - then do a "prudent rebalancing" to conform to your allocation plan. Typically accounts are checked and balanced at least once a year, usually after the start of the year. Some people rebalance several times a year.

How exactly should the allocation be done? Different planners use different models. Most planners emphasize stocks over bonds, since historically, stocks have outperformed fixed-income instruments.

"Most people already have other assets that are totally separate from the stock market," notes Hoffman. "They may own a house; they have a car or cars; they have savings and checking accounts." At work, they may have company retirement plans.

Tim Schlindwein, a principal at Schlindwein Associates, a consulting group based in Chicago, urges people to consider a mix of 10 to 18 mutual funds with different aims. A portfolio of nine domestic and nine international funds could cover the waterfront of objectives, he says, from government bonds to corporate high-yield bonds, from small-company to blue-chip stocks, and from "value" to "growth" investment styles.

Another approach is index funds, which can offer similar diversification with fewer funds. Vanguard offers three funds, for example, that track the US stock market, bonds, and foreign stocks.

Brokerage firms offer some basic advice on asset allocation, which they modify as market conditions change.

Campanale offers approaches for different types of investors:

Conservative. For investors skittish about stocks, or who wish to stress fixed-income instruments, he suggests a portfolio of 0 to 20 percent stocks, 60 to 90 percent bonds.

Moderate. This is for more typical investors. The stock component would be 45 to 65 percent; bonds would range from 20 to 50 percent. Up to 10 percent of the stocks would be international.

Aggressive. This is for an investor eager to profit from the stock market over time. Up to 90 percent of assets are invested in stocks, of which 10 to 40 percent is in international equities.