Building For The Future (Part 7)

Home maintenance isn’t on most people’s list of favorite things to do, but without scheduled upkeep, bad things happen. Hot water tanks rust, roofs leak, painted walls start peeling, and your shiny new home begins to look tired and frayed around the edges. In the same way, an investment portfolio needs to be maintained if it is to continue to meet your needs.

There are two major forms of adjustment to an investment portfolio: strategic and tactical. Strategic adjustment has to do with you–you do a strategic reevaluation when your circumstances change. Tactical adjustment has to do with the securities in the portfolio—usually when an asset class does a lot better or worse than the overall market.

Rebalancing at these times encourages investors to buy assets that have done poorly, and to trim holdings that have done well. While this is psychologically hard, it’s a good way to add value over time. It helps people to sell stocks when they’re hot, and to buy them when they’re not. But be careful. A stock that sold at 50 isn’t necessarily cheap at 25, if their business model is broken. At such times it pays to be cautious.

When the whole market becomes irrationally exuberant or gloomy, though, it makes sense to rebalance. If you had a balanced portfolio in 1985 and rebalanced it whenever it got to 60/40, you would have added 25% to your portfolio over the next two decades, purchasing equities in 1993 and buying bonds in 2000.

Portfolio maintenance isn’t terribly exciting, but it’s necessary. Sometimes the most mundane tasks that turn out to be the most valuable.

Douglas R. Tengdin, CFA

Chief Investment Officer

By |2013-02-26T10:15:53+00:00February 26th, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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