FEDweek

Keeping Your Investments Balanced

Rather than try to time the market, work with a basic asset allocation. Then sell the asset classes that are 20 percent above your target while buying under-allocated classes.

For example, say your plan calls for 10 percent of your portfolio to be invested in small-company stocks, probably through mutual funds that invest in small companies. You should have a mental band of 8-12 percent, two points above or below your 10 percent goal.

Thus, you’d sell some of your small-cap fund shares when the total allocation to small companies tops 12 percent of your portfolio. When the allocation goes below 8 percent, you’d buy enough to get you back to the 10 percent mark.

Over time, you’ll be buying low and selling high for all of your asset classes, which is a formula for investment success. When you sell shares, try to trim within a tax-deferred account such as an IRA to avoid capital gains tax. If you must sell shares held in a taxable account, specify the ones with the highest cost in order to minimize the tax bill.