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Rebalance to Reduce Risk

It's understandable if you're feeling off balance about your investments these days. After all, stock funds whose growth seemed unstoppable for nearly two decades stumbled and fell for more than three years. Since the first quarter of 2003, noteworthy growth seems to have resumed.

Yet after several uncertain years, you may be tempted to make a change in your holdings. Emotional reactions to investing setbacks can compound the problem.

There is a reasoned approach to making investment changes. Known as “rebalancing,” it's the cornerstone of a disciplined investment strategy. Rebalancing simply means bringing your mix of investments back to the same proportions you intended when you began investing. To do this, you may need to sell shares from the best-performing asset class and put them into the worst performing asset class. It's the opposite of chasing returns and is often tough to do.

Why Rebalance?

When you began investing in The Consolidated Edison Thrift Savings Plan, you probably decided on your chosen asset-allocation mix based on the time you had to invest and your tolerance for losses. While your original reasons for asset allocation may not have changed, your actual asset allocation may have drifted off course in response to market changes. As the stock market rose and fell then rose again over the last few years, for example, the percentages of your portfolio devoted to each of the asset classes – short-term reserves, bonds, and stocks – probably changed dramatically.

It is sometimes hard to remember that the primary purpose of rebalancing is to manage risk, not to maximize returns. In the long run, rebalancing may also improve returns because it puts the very best investment advice into action – buy low and sell high.

Balancing Act

To keep your plan on track, set a schedule. Pick a date – perhaps a birthday or an anniversary – to review your investment plan each year. If you need to make a change, you can rebalance in two ways:
  • Make an exchange. If your asset allocation is dramatically out of balance, you can transfer money from one type of fund to another. If you move retirement money within your employer's plan (or an individual retirement account), you won't owe any taxes. Outside a retirement plan, however, you may incur taxable capital gains by exchanging shares. If this is the case, you may prefer to rebalance using one of the next two methods.
  • Redirect your new investments. You could simply add new money to the asset class that's underrepresented in your portfolio.
Be Sure to Stay on Course

Remember, successful investing usually means doing just a few things right – and avoiding some common mistakes:
  • Being overly aggressive. Some investors delight in risk and might concentrate their holdings in one high-flying area. The danger: if the market turns against you – as it did with technology after the boom of the late 1990s – the drop could be significant and the recovery might take a long time. The lessons: make sure your investments are in line with your overall goals and you're properly diversified.
  • Chasing performance. A related mistake is jumping into last year's top-performing fund. If you invest after a terrific run-up, you may be arriving just in time for the fall.
  • Timing the market. Which area of the market will perform best is anybody's guess. Yet many investors are “market timers.” They try to predict where the best returns will be and move their money there. Inevitably, market-timing leads to more bad decisions than good ones.
  • Overlapping holdings. Don't spread your money among too many funds. You'll probably have a good deal of overlap among holdings. You can put together a widely diversified portfolio with just a few well-chosen funds – or even one balanced index fund, if that's your preference.
How to Take a Risk Checkup

Go to Vanguard.com® and complete Vanguard's Investor Questionnaire. The questionnaire helps you assess how well you'll be able to withstand the inevitable market swings. Complete one for each of your long-term goals, those you plan to finance in more than five years. Based on your responses, the questionnaire will suggest an asset mix – one of nine model portfolios. Just go to www.vanguard.com.

Questions?

Please call a Vanguard® Participant Services associate at 1-800-523-1188. Associates are available Monday through Friday from 8:30 a.m. to 9 p.m., Eastern time.

We hope you'll make the most of The Consolidated Edison Thrift Savings Plan to save for retirement.

For more information about any fund, including investment objectives, risks, charges, and expenses, call The Vanguard Group at 1-800-523-1188 to obtain a prospectus. The prospectus contains this and other important information about the fund. Consider and read the prospectus information carefully before you invest. You can also download Vanguard fund prospectuses at www.vanguard.com.

Vanguard and Vanguard.com are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners.

© 2004 The Vanguard Group, Inc. All rights reserved. Used with permission.