Keep Stock Portfolio Balanced

One of the problems stock investors have is losing their balance. This balancing problem can occur in a rising market or in a falling market.

Whenever is happens you need to take steps to correct it or risk exposure to risks you probably don’t want to take.


The balance I am referring to is the ratio in your portfolio of stocks, bonds and cash. Every investor should have a ratio in mind (some leave out cash) of how they want their investments to be in proportion to their total portfolio.

This breaks down even further with each category so the investor establishes what is for him or her the correct balance to meet risk tolerance and investment objectives.

At the top level, an investor might establish a goal of 65 percent stocks, 25 percent bonds and 10 percent cash as the right mix of his or her portfolio. These percentages are measured in dollar amounts, so all the investments are marked to a current value for that purpose.

Stock Category

Within the stocks category, the investor may want 25 percent in large cap, 25 percent in mid-cap, 25 percent in small cap, 15 percent in REIT (real estate investment trusts) and 10 percent in foreign stocks.

By sectors, the investor might say I want 30 percent in retail, 30 percent in health care 20 in high tech and 20 other.

Whatever the mix, if one or more of the components rises or falls rapidly, it can pull your investment plan out of balance.

In the example above, if health care had a rapid increase it could become much larger than 30 percent of the portfolio. The question you have to ask is this just temporary? If health care is now 45 percent what do you do to get it back in line?

You have two options. First, you can sell off some of the health care and reinvest the profits in other areas to bring those percentages up. Second, you can invest more money in the other sectors to raise their percentages. (By Ken Little)