ISBN: 0-03-031529-8

NEWSWIRE - February 11, 2002

Topic: Asset Allocation

Source: "Time for a Portfolio Trick: Rebalancing," by Karen Damato, The Wall Street Journal, Monday, Febuary 11, 2002, page C1.

Synopsis: Portfolio management is often reduced to two sets of decisions: asset allocation and security selection. Most financial planners and academics would agree that the asset allocation decision is the more fundamental of the two. This article stresses the importance of setting an appropriate allocation of an individual's investments across asset classes. However, most investors don't make the effort to rebalance their assets to return to a suitable target allocation. For example, many investors with a relatively even balance between stocks and bonds in the mid-90s were overweighted in stocks by 2000 because of the strong bull market of the late-90s. On the other hand, investors constructing a portfolio with equal weights of stocks and bonds in 2000 would now find themselves with a much larger proportion in bonds due to the poor recent performance of stocks and the rally in the bond market. The article stresses the importance of rebalancing to control portfolio risk and to potentially enhance return as well.

Discussion Questions:

1. What is asset allocation? Why is it such a big deal?

2. Explain the role of rebalancing in the asset allocation process.

3. How frequently should a portfolio be rebalanced?

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