Published: September 3, 2009

When Enron's accounting fraud came to light and the company went bankrupt, Enron employees not only lost their jobs -- they lost an estimated $850 million on the Enron stock held in their retirement accounts. Bear Sterns and Lehman Brothers encouraged their employees to hold stock in their companies. That turned out to be patently bad advice -- and not just because the companies crumbled during the credit crisis. It's also bad diversification advice.

All Your Eggs in the Company Basket
Fidelity Investment maven Peter Lynch coined the adage, "Invest in what you know." Although people know and understand the companies they work for, they need to draw the line when it comes to investing where they work. After all, they already have a significant investment in the company.

When you look at your portfolio, you need to look at all your assets, not just the stocks and bonds in your brokerage account. You are an asset. In economic parlance, you are human capital. When you work for a company, you are, in effect, investing your capital with them. Once you count your salary and benefits in your portfolio holdings, you'll likely discover you are already "overweight" in your company.

Don't You Already Own Real Estate?
There are a number of studies that illustrate the diversifying powers of real estate. Ibbotson Associates has shown that when Real Estate Investment Trusts (REITs) were added to a portfolio of stocks, bonds and Treasury bills, overall portfolio returns increased while risk decreased.

But if you are one of the 67.4% of Americans who own a home, you already have a boatload of exposure to the real estate market. Your home represents about a third of your net worth on average. What's more, about two-thirds of homeowners have a mortgage, which means the investment in their home, and therefore real estate, is leveraged.

Residential real estate doesn't correlate one-for-one with commercial real estate, but it would be hard to build a case for homeowners adding exposure to the sector.

Rebalance When it Counts
By design, a well-diversified portfolio doesn't stay that way. Some assets will outperform and do your portfolio's heavy lifting while others rest. In time, you'll be overweight in the assets that had a nice run. Unfortunately when it's their turn to rest, these positions will create a big drag on your results.

Rebalancing a portfolio isn't as exciting as researching a new opportunity. Most investors treat rebalancing like a painful chore, relegated to a New Year's resolution list.

An annual rebalancing is good, but rebalancing after a rally or a correction is far better. These are precisely the times when your imbalances are the most pronounced and pose the most risk. But the added advantage of rebalancing during peaks and troughs is that it will force you to "buy low and sell high" -- which is just what we investors aim to do.

Since March, the S&P 500 Index has had a nice rally -- up over +40%. There have been some noteworthy outperformers and surprising underperformers in that time. Commodities have a well-deserved place in a diversified portfolio. But if you were invested in, say, copper, commodities may now be taking up more space in your portfolio than you realize. Southern Copper (NYSE: PCU), for instance, is up about +120% since March.

Some investments "rested" during this recent rally, mostly representing some recession-resistant sectors like grocery stores, utilities and telecoms. Many telecom companies, especially wireless providers, have been adding subscribers and maintaining a steady stream of revenues and cash flow throughout the recession. That's a sector I believe is poised to do some heavy lifting in the next market cycle.

The Time is Now
This year, do yourself a favor. Don't wait until January 1st to think about rebalancing your portfolio. Get rid of your company stock, look at your real estate positions with a critical eye, and scale back your overweight positions with an nose for the next market cycle.

Always Searching for the Next Great Idea...

- Amy Calistri
Chief Investment Strategist
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