Rebalancing

Investors build diversified portfolios to take advantage of the varied returns of different assets/investments. One risk in diversification is that over time, better performing assets will become a larger portion of the portfolio and change the risk of the portfolio.

As an example, starting in 2000 a portfolio with 50% in the S&P 500 and 50% in the Lehman U.S. Aggregate Bond index would have had just under 60% in bonds at the end of 2007.

One way to avoid this drift is to periodically rebalance a portfolio back to its target asset allocation. Rebalancing helps reduce risk and reduce the severity of fluctuations in account value.

It is wise to set a schedule for rebalancing, say on your birthday or semi annually. This helps take the emotion out of when to buy or sell. Or set percentage ranges, say up or down 5% from your desired allocation.

The strategy you choose should be based on the type of account and how the changes will be made. Taxable accounts should be rebalanced with new money or with offsetting gains and losses. This is done to limit or avoid paying taxes and limit trading costs. In retirement accounts, rebalancing is easier because you don't have to worry about taxes but you still have to consider trading costs.

U.S. Dollar Lower = Higher Gas Prices

Now that the U.S. Government owns 60% of GM and making decisions for the company expect higher gas prices and a weak U.S. dollar.

The Obama administration and its environmental ilk want drivers to burn less gas because they believe it causes global warming. To burn less gas Obama will have GM build small, less safe but more fuel efficient cars. The only problem is people do not want to buy those types of cars.

The only way the purchase of GM by the government can be successful is if the small cars they produce sell. And, as we know from high gas prices last year, people only buy small cars when gas prices are above $3 a gallon. So, how does the Obama administration raise gas prices without raising fuel taxes or putting price controls on oil? Weaken the value of the U.S. dollar.

The price of oil is denominated in dollar terms so the price is not only affected by the supply and demand of oil but also the value of the U.S. dollar. When the dollar loses value it takes more dollars to purchase the same amount of oil and, as you know, when the price of oil goes up the price of gas goes up.

Expect high gas prices and a weak U.S. dollar for the foreseeable future.