Guide to Benefits & Education »
Recommended AAII Tools & Benefits
For the member wondering where to start, the AAII editorial staff recommends the following list of AAII tools and benefits.
Learn More »
Frequently Asked Questions About Financial Statements
Reading a company's literature can still be a mystery if you don't understand the jargon.
Take the Course »
You’ve carefully weighed in your own mind how you want your retirement portfolio to look: just the right amount of your assets allocated to stocks versus fixed-income investments. You feel comfortable with the growth/income and risk profile of your portfolio, and you have carefully diversified your investments over all the investment categories, and even within each category. Then, inevitably, the market jumps up or down, and your portfolio is thrown completely off balance.
First, relax. Your asset allocation guidelines are just that—guidelines. Aim to hit your percentage asset allocation targets over the long run, but be prepared to accept short-run variations caused by normal market cycles that will affect large stocks, small stocks, international stocks, and bonds differently.
How much variation should you tolerate before you need to take action to rebalance your asset allocation?
There really is no precise answer. But when asset allocations are off 10% or more, the process of rebalancing should start.
As an example, let’s say your broad asset allocation guidelines call for 70% invested in stocks and 30% invested in fixed income. If stock prices rise and cause your allocation to change to 80% in stocks and 20% in bonds, it’s probably time to rebalance.
If your 80% stock investment remains well-diversified but it is simply too large a portion of your retirement portfolio, it makes sense to nudge the percentage back toward 70%. How should you accomplish this?
Your first choice should be to rebalance using your current periodic contributions. If your portfolio value is very large relative to your annual contributions, you may have to redirect as much as 100% of your contributions toward fixed income in order to rebalance. If redirecting your contributions won't result in...
Turn to any listing of mutual fund returns, or even stocks, and you will likely see a “summary” of those results, referred to as the “average” return. For example, a listing of mutual funds in a particular category may show the average return for the fund in that category. A different listing may show a particular fund’s returns for each of the last five years, and an average annual return over that five-year period.
Many individuals assume those averages are all calculated in the same way. In fact, they are not.
The dictionary definition of an average is: A single value that summarizes or represents the general significance of a set of unequal values. But there are a number of different ways to present a “summary” of values, depending on what you are seeking to measure.
...
