Why Should I Rebalance My Portfolio?

Figuring out your asset allocation is usually one of the first steps in figuring out how you are going to distribute your funds within the capital markets of the investing world. Creating an asset allocation ensures that your investment strategy matches your risk tolerance, investment time horizon, and goals, and that these are in line with your risk reward potential. However, when an asset allocation is not upheld over time with regular rebalancing, you may find that your portfolio had significant gains in one area, which have grown to a point where any shifts in the market could have a significant effect on the entire portfolio. The problem would be if this effect is negative and outside your original risk tolerance. Essentially, rebalancing your portfolio will ensure that your well diversified portfolio is not overly dependent on any one stock, bond, fund, or other asset.

Photo by Jeremy Thomas on Unsplash

How often should I rebalance?

When it comes to how often you should rebalance, you may get competing advice. Most advisors suggest rebalancing at least once a year, while others suggest doing so quarterly or when the market has moved into a correction or the value is out of balance by more than 10% in any one area.  Whatever timeline you choose is up to you. There is no right or wrong answer; however, once you create your plan and choose you method, stick with it. Discipline is one of the most important variables for producing positive long-term results. Periodic rebalancing helps in removing some of the emotional side of investing. It will prevent you from trying to time the market; you will not find yourself holding off on buying a decreasing asset waiting for the bottom of the market or riding a bubble to the very top.

Photo by Allie Smith on Unsplash

There are cases against rebalancing, as well. When you look at one asset against another you would often have to ask yourself why you would sell off a well-performing asset to purchase one that is not preforming as well. This means that rebalancing your portfolio offers a certain amount of market contrarianism. Rebalancing is, in a sense, betting against the market trend, by selling a little of what has done best lately in order to buy a little of what has done worse. But when looking at it from a technical perspective, if you were rebalancing on a regular basis and you were rebalancing at the height of the market in February of 2020, you would have been selling stocks that were performing extremely well and purchasing bonds. A month later you would have found yourself with an opportunity to sell bonds and purchase stocks at a new lower price than the month before.

When looking at different strategies for rebalancing discuss your options with your financial professional and your tax advisor. There can be different tax consequences depending on the type of securities and accounts you are trading.

Do you rebalance? If so, what is your method?

Tell me your stories and your thoughts by leaving a comment below. Let’s have a better money conversation.

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