Should I Rebalance My Portfolio or Hold Onto My Winners?

published 31 December 2010

This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.

Rebalance regularly if you have a portfolio of mutual funds. The disparate swings of the stock and bond markets are sure to set your well-laid plans awry—particularly anytime one asset class has a standout year (good or bad). By rebalancing to return your portfolio to the desired mix—say, 50% in stocks and 50% bonds—you’re forced to buy low and sell high. That’s because you’re getting rid of some shares in the winning category and buying more of whatever lagged.

Let your winners ride if you own individual stocks. The reason? Every time you sell a stock, you have to pay trading fees and perhaps taxes (unless your money is in a retirement account). And then you’ve got to find something better to buy with the proceeds. That’s so tough to do that academic research suggests those who trade the least get the best results. Sell an individual stock only if you think the company’s prospects have dimmed or if its price has soared into unreasonable territory. Ask yourself: At these prices, would I buy this stock today? If you would, hang on.