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Stock Portfolio Balance Maintenance Techniques

When you establish your investment portfolio you should balance it among the different asset classes. Once established your work doesn't stop here. You should continually study it in order to keep this balance. It may seem a difficult task, especially when the market is moving upwards or downwards.

If you fail to restore the balance in your portfolio you may expose yourself to higher levels of risk than you are willing and able to take.

Stock Portfolio Balance

Under portfolio balance you should understand the right asset allocation between stocks, bonds and cash. The money you invest should be proportionally divided among these classes. The proportion should be determined before you start investing and it should meet your needs and goals.

Aside from the proportion between stocks, bonds and cash, a proportion within the categories should be also established.

The stock class may be divided in different ways.

Alternative 1: By Category

  • Large-cap - 30%
  • Mid-cap - 15%
  • Small-cap - 25%
  • REIT (real estate investment trusts) - 10%
  • Foreign stocks - 15%

Alternative 2: By Sector

  • Retail - 40%
  • Health care - 20%
  • High tech - 30%
  • Other - 10%

Keep in mind that these numbers are only an illustration, not a recommendation or a must.

So, it is up to you to decide on the actual asset allocation that will best meet your needs and goals. However, a rise or fall in one of your portfolio components may take it out of balance.

If, for example, the proportion of one of the components increases, then it may be good to sell the increased component and use the money to restore the balance by investing in the other components. On the other hand, if you have some cash free you can use it to invest in the rest of the components to restore the balance.

The important thing to remember is to keep you portfolio in balance since it represents the plan which will lead you to the achievement of your financial goals.

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