Rebalancing: Let Your Broker Do Heavy Lifting

Fidelity E-mails investors when their portfolio is off balance.


It's the same idea as the automatic alerts banks offer that notify you when your balance dips below a certain threshold. Beginning this week, Fidelity is giving brokerage clients the option of using a "monitor and alerts" feature, which E-mails investors each quarter when their asset allocation is off its target by more than 10 percent. Fidelity says it's considering also making the tool available to 401(k) investors.

The alert, which is free to brokerage clients, will direct investors to a "monitor" page, where they'll see rebalancing steps they can take. To participate, investors must select a target asset mix by completing a retirement quick check, an income plan, or a portfolio review.

This isn't a completely new concept. WellsTrade account holders at Wells Fargo have access to a portfolio tracker that sends out monthly E-mails notifying investors when their allocations drift. Schwab offers a similar feature for institutional clients.

Fidelity says only a quarter of Americans reported rebalancing their portfolio in the past six months, according to a March 2007 study. Why should you rebalance? Consider this example from Morningstar's Interactive Classroom:

Say that you originally constructed a portfolio of 60% stocks, 30% bonds, and 10% cash. If left alone over a 20-year period, that portfolio could easily morph into a blend of 84% stocks, 13% bonds, and 3% cash.... If stocks take over your portfolio (as they did in our example), your returns may rise but so will your risk. Moreover, you may find yourself with insufficient cash on hand to meet short-term needs. The only way to return the portfolio to the original risk level is by buying and selling funds until you reach your original allocation.

How often should you rebalance? There are differing opinions on this, but Morningstar says investors who rebalanced at 18-month intervals succeeded in tempering their risk and paid less in capital-gains taxes than those who rebalanced more frequently.