Benefits Of Rebalancing Your Portfolio
Maintaining a portfolio that aligns with your objectives and risk tolerance requires something called rebalancing. Your portfolio has a certain mix of asset types, like stocks, bonds, and real estate. Asset prices fluctuate, meaning their weighting will shift over time. This leads to the goal of maintaining and investment mix that supports you as an individual. Rebalancing also mitigates volatility and manages potential risk.
Periodic Time-Based Rebalancing
Rebalancing looks like selling assets that have appreciated beyond your long-term weighting and purchasing assets that have fallen below your target level. This strategy involves rebalancing at regular intervals, like annually, quarterly, irrespective of asset price movements.
Threshold or Price-Based Rebalancing
This strategy involves rebalancing once the portfolio deviates from the target mix. A mix is typically made up of stocks and bonds. Stocks are risky and bonds are safe. Moderate portfolios are typically 60% stocks and 40% bonds while aggressive portfolios are 80% stocks and 20% bonds. If a moderate portfolio starts to become more aggressive, then it is time to rebalance.
When To Rebalance?
Market Volatility
Investors commonly look to rebalance during stock market upward and downward trends. Volatility is not always a time to rebalance, and the goals is not to overreact to the market. Someone may want to increase their stock holdings, during an upward trend. If this was a moderate portfolio and veered into 70% holdings in stocks, it might be time to rebalance again.
Major Life Events
These events include retirement, expecting a child, buying a home, or going through a major health event. As life changes, so will your financial goals. Life changes will beckon you to re-evaluate your portfolio and rebalance as needed. This typically happens as people approach retirement. Retirees want a portfolio that is much safer than when they were in their 30s. They are reliant on that money to live and for their estate to pass on to their loved ones. Another situation could be that family member did pass and you received an inheritance. This would also be a time to invest and rebalance.
Diversification
This is the key to a well-performing portfolio. If you are concerned that your portfolio is not diversified enough or want to add a new investment, then it is time to rebalance.
It’s Been a While
Lastly, if you have not visited your portfolio in over a year and cannot remember what is going on it may be time to rebalance. Professionals recommend rebalancing quarterly or on an annual basis. This may not change much but provide clarity that you are on track.
Financial professionals are the best resources to draw on for rebalancing portfolios, based on tools and experience. Working hard to tend to your portfolio will reap exponential returns.
Matt’s Corner
