Portfolio Improvements: Rebalancing and Alternative Investments
How to keep a portfolio on target year after year. And when to consider REITs, commodities, or other alternatives.
A portfolio is not a 'set and forget' machine. Market movements cause allocations to drift, and life changes require periodic adjustments. The good news: the ongoing work takes about 30 minutes per year.
Rebalancing 101
Rebalancing means returning your portfolio to its target allocation. If stocks have surged, you are now overexposed to stocks. You sell some to buy bonds and reset. This forces you to buy low and sell high automatically.
Check allocations once per year (e.g., every January).
Rebalance if any asset class has drifted more than 5% from its target.
Do most rebalancing by directing new contributions to underweight asset classes. It avoids taxes.
Alternative Investments
After you have a solid core of stock and bond index funds, alternatives can add diversification. Used carefully, they lower volatility without sacrificing much return.
I Bonds & TIPS: Inflation protection for 5-10% of fixed income.
International small cap / emerging markets: 5-10% of stocks for extra diversification.
Commodities & gold: Optional 0-5%; evidence on long-term return is mixed.
What to Avoid
Steer clear of individual stock picks above 10% of your portfolio, leveraged ETFs held for more than a day, anything with expense ratios above 0.75%, and private investments sold through high-pressure sales channels.
Key Takeaways
Rebalance annually, or when any asset drifts 5%+ from target.
Direct new contributions to underweight assets to avoid taxes.
Add alternatives (REITs, I Bonds) only after the core is solid.
Avoid individual picks, leveraged products, and high-fee funds.