What is Rebalancing Your Portfolio?
Rebalancing simply means returning your portfolio to your desired investment rations. In the investing world, this target balance of different investments is called asset allocation. Depending upon market conditions some investments perform better over time than others which means the balance of your investments shifts as time goes by.
For example, let’s say your original target asset allocation was 60% stocks and 40% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 60/40.
Why You May Need to Rebalance Your Portfolio
Portfolio rebalancing primarily prevents the investor from being overly exposed to a certain amount of undesirable risks. This step is taken to help ensure the amount of risk involved is at the investor’s desired level. Along with the performance variable, investors may adjust the overall risk within their portfolios to meet changing financial needs.
While there is no required schedule for rebalancing a portfolio, I recommend an examination of allocations at least once a year at your annual review. Rebalancing gives investors the opportunity to sell high and buy low, taking gains form high-performing investments and reinvesting them in areas that have not yet experienced such notable growth.
Just as a reminder, rebalancing is the act of adjusting portfolio asset weights to restore target allocations or risk levels over time.
Overall, the closer you get to retirement, the more attention you should pay to asset allocation and rebalancing.
Give us a call and we can schedule an appointment to look over how your assets are being allocated and if it may be the right time for you to rebalance your portfolio.
This is meant for educational purposes only. It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Keep in mind that rebalancing may have tax consequences and transaction costs associated with this strategy. Please consult with your financial and tax advisors regarding your personal situation. (01/21)