How Do You Rebalance a Stock Portfolio?

Suppose you have a portfolio breakdown as follows:  10% cash, 40% real estate, 15% mutual funds, 30% bonds and 5% individual stocks.

Imagine that your individual stocks increase in value to the point that your portfolio allocation now changes?  How do you make sure the portfolio remains balanced?

First of all, you will notice that only 5% of the portfolio is placed in the riskier investment of an individual stock.  The other 95% allows for growth but is highly concerned with principal protection.  Limiting your riskier investments to less than 10% of your portfolio allows for potential growth with minimal risk.

Verizon stock, which lies in the 5%, just went up to $45.78/share about 10% up from a few months ago at $41.202/share.  At a macro level, this puts the portfolio allocation in individual stocks slightly higher than desired.  This means, that some of this stock should be sold to reset the asset allocation.

At a micro level, we want to implement a strategy so that we make money in an upward market, sideways market and downward market (see sizusfinlit.blogspot.com).  Since we believe in the company, this means that we rebalance that position, selling off some of the gain this year.  While most people are looking to make a homerun, we are looking to hit singles.

So both at a macro level for asset allocation and micro level to have a money making position, we sell off a very specific percentage of the position.  There are no sales fees to do this since the position is large enough.  Also, we will set a market alert for $50.358/share and $41.202/share to monitor this position.

Do you rebalance?  Do you have a macro and micro strategy?  Is your strategy affected by emotion?  Do you do what everyone else is doing?

This post was reposted from http://finlit.biz/retirement-2/how-do-you-rebalance-a-stock-portfolio/, originally written on February 25th, 2013.

5 Obligations for a General Public Company

In general, public companies have various items they need to pay before they can claim a profit.  If you are an investor, do you know the various items and where you are on the list as far as when you will get paid?

If you were a creditor for a real estate property, wouldn't you want to know whether you were the first to get paid or the last on the list to get paid?

Here are the obligations for a general public company, ranking from the order in which they get paid:

1. IRS Taxes
2. Debentures or Unsecured Debt
3. Bonds or Secured Debt
4. Preferred Stock
5. Common Stock

Most people purchase common stock and don't realize that the company must pay off all debt before they can pay a dividend on common stock.  Even the preferred stock holders must wait until the debt gets paid.  In some cases, the company will claim bankruptcy and all proceeds will go to paying off debt, leaving the shareholders with nothing.

Read more at useconomy.about.com.

This post was reposted from http://finlit.biz/retirement-2/5-obligations-for-a-general-public-company/, originally written on February 5th, 2013.