Start your reallocation project by listing all your investments and identifying which asset class each of them belongs in. Total up the dollars invested in each asset class and calculate what percentage of your entire portfolio that represents. Compare these percentages to your “target” allocation.
Now that you know where you need to make adjustments, how can you make the changes effectively and efficiently? Plan ahead.
“Every time you make a contribution to your investment accounts, you have a chance to put cash into under-weighted assets,” says Alice G. Bullwinkle, CFP. “For example, you can request that the dividends from your stock holdings be paid in cash instead of reinvested in stock, and use that income to beef up your non-stock assets.”
You also have the option of selling some of the holdings in an over-weighted asset class and reinvesting the money in another asset class. Beware: You could end up with a tax bill if you have a gain on investments that aren’t part of a tax-sheltered account (like a 401(k) or an IRA). Talk to a financial planner or tax professional before shifting large amounts.
Another option is to invest in one or more mutual funds that allocate investments for you, often referred to as “balanced” funds. Unlike balanced funds where the asset allocation may not change over time, Lifecycle or Lifestyle funds change as their maturity date approaches. These are especially popular in retirement plans where participants are concerned about managing their retirement portfolio. Letting the fund do all the work saves you the hassle of constantly keeping tabs on your portfolio’s allocation. And that means more time to daydream about retirement.