Share this Page URL
Help

Chapter 14. Betting on the Right Horse > Too Much of a Good Thing—Rebalancing - Pg. 147

Betting on the Right Horse · Have a good chance of getting your target rate of return · Are true to your investor profile · Have enough time (time horizon) to smooth out the ups and downs in the markets 147 Too Much of a Good Thing--Rebalancing When things are going well with your investments and you are making 15 to 20 percent per year, you probably do not think much about your investor profile. But two or three years of double-digit returns similar to 1995, '96, and '97 can make you more aggressive than you want. Here is what happens: Table 14-2. Balances at the Beginning of Each Year Year 1 Dollars Stocks Bonds Cash Totals $10,000 $6,000 $4,000 $20,000 Alloca- tion% 50% 30% 20% 100% Return % 37% 7% 5% Dollars $13,700 $6,420 $4,200 $24,320 Year 2 Allocation 56% 26% 17% 100% Return 23% 6% 5% Dollars $16,851 $6,805 $4,410 $28,066 Year 3 Allocation% 60% 24% 16% 100% While your portfolio has made you money for two years running, you have moved from a moderate investor to a moderately aggressive investor. In year 1, you began with 50 percent of your money in stocks, and by the end of year 2, you have 60 percent of it in stocks. If this continues long enough, you will end up as an aggressive investor.