If you took the advice in our recent article titled “Time is Right to Harvest Your Portfolio”,
you likely have extra cash sitting around ready to be invested. If you didn’t see the
article mentioned above, you can view it online on the Oakland Insider web site or check
it out on the “In The News” page on our website: www.pattersonadvisorsllc.com.
We recommend that our clients rebalance their portfolios annually at a minimum. We
also recommend that you rebalance the same time every year in order to stay
disciplined and minimize trading costs. Without a scheduled time to reblance, it is
tempting to rebalance when you think you can time the market. Investors need to be
careful about buying mutual funds late in the year since many funds distribute dividends
and capital gains at year end. If you buy a fund just before it makes large distributions,
you are, in effect, buying a tax liability. Once the distributions are made the fund’s net
asset value (NAV), esentially its’ trading price, will decrease by an amount proportional
to the dollar amount of the distributions. The distributions will be taxable to you even
though you only owned the fund for a short period of time. Therefore, early in the year
is a good time to make portfolio purchases.
Regardless of whether you have cash to invest, you should periodically adjust your
portfolio to reflect significant changes in its makeup. This assumes that you have a well-
diversified portfolio. If not, see a financial advisor for advice on how to accomplish this
critical task.
A well-diversified portfolio will have an overall equity to bond target mix (e.g. 70%
equities and 30% bonds). Additionally, it will have several bond asset classes and
several equity asset classes, each with a target allocation. When an asset class has
appreciated to a point that it has significantly exceeded its target percentage allocation,
you should sell enough of the asset class holdings to bring the amount back in line with
the target allocation. Likewise, if an asset class has fallen significantly below its target
allocation, it’s time to buy more of the asset. Doing this forces you to do what’s right:
sell when asset values are high and buy when asset values are low. This is the opposite
of what most investors do. Many investors buy the latest hot assets (buy high) and sell
when asset classes have decreased in value (sell low).
Asset classes (e.g., large domestic stocks, short-term bonds, international stocks, etc)
experience up and down cycles based on economic factors. It makes sense to buy them
when they are relatively low in value and sell them when they are at their relative peak.
It takes discipline, however, to do this, since investors typically want to sell when assets
have decreased in value. However, if you have good mutual funds in your portfolio, a
significant decrease in a fund’s value will be due to overall asset class movement and
not due to poor fund performance.
Making regular adjustments (at least annually) to your portfolio should produce an effect
similar to dollar-cost-averaging. No one can time the peaks and valleys of asset classes
or the market overall. Nevertheless, periodic adjustments will keep your portfolio well
diversified, increasing your returns while at the same time reducing risk.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, January, 2008,
Now is a Good Time to Adjust Your Portfolio
By David and Erin Patterson