How to Rebalance Your Portfolio (and Why It Matters)
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The choices you make about your investments are intentional, representing a mix of different asset classes that reflect your tolerance for risk. However, market changes can cause that mix to drift — which can impact your ability to reach your goals in the way you planned. Rebalancing your portfolio realigns these assets to your intended levels.
Portfolio rebalancing helps you stay on track to reach your investment goals in two critical ways:
These regular tactical changes take advantage of shorter-term opportunities without losing sight of the long-term strategic allocation.
Having a diversity in asset classes (stocks, bonds, real estate, precious metals) and also diversity within asset classes helps balance risk and ensure that you’re getting the returns you anticipated. A balanced portfolio helps protect you from market volatility and spreads your eggs across multiple baskets.
Building a diversified portfolio gives you a strong foundation, but you need to revisit your asset mix regularly to offset asset mix drift. For example, you have invested in stock X, which has recently increased in value significantly. That stock now makes up a larger percentage of your portfolio than you had planned. If stock X suffers a sudden downturn, you could experience a more significant loss than you are willing to take on. Rebalancing investments allows you to stabilize your portfolio so you can continue to build toward your goals.
If your portfolio includes anything other than target date funds (which automatically rebalance) or is not professionally managed, you should rebalance regularly. There is debate about how often, but once a year or when your asset mix drifts more than a few percentage points off your intended balance is a good baseline.
If you have taxable non-retirement investments, you may want to rebalance at the end of the year to take advantage of tax-loss harvesting. If your accounts are non-taxable (like most retirement accounts), it doesn’t matter when in the year you rebalance.
The best way to start is to review your ideal situation, taking into account your preferred level of risk. Your risk tolerance is impacted by your current financial situation, your goals, your timeline and your personal approach to investing. If any of those have changed significantly you should meet with your financial advisor to evaluate your strategy.
Most accounts will include a breakdown of your current asset mix. Now that you know what your ideal mix is, look at your portfolio’s current allocation and compare that to the ideal, as well as the room for error percentage that you set. For example, if your ideal is 70% of your portfolio invested in stocks and it is currently at 71%, rebalancing may not be necessary. However, if it’s at 75% stocks, perhaps you are no longer comfortable with the increased risk. If you have multiple accounts, you should look at all of your accounts as a whole to determine what changes need to be made to your overall investment portfolio rather than looking at each account individually.
There are two ways to rebalance:
Rebalancing can be difficult and time-consuming, but it also allows you to take a deep look at your investment portfolio. If you’re looking for professional help as you manage your investments and work toward your financial goals, talk to a Farm Bureau financial advisor.