Rebalance Your Portfolio

Investing is all about fear (of losing money) and hope (of making money). The process of rebalancing demands we actually have faith that our target asset mix/investor profile will protect us from a loss we can’t afford yet still make us the money we need to meet our goals.

What Is Rebalancing?

Rebalancing is the process of buying and selling investments to bring your portfolio back to its investor profile (that is, aligning your current asset mix with your target mix). Investments across and within asset classes experience different rates of return: daily, monthly and annually. Equities, in particular, tend to over- or underperform. If stocks have gone up and bonds down, rebalancing may be required.

When Do I Need to Rebalance My Portfolio?

Rebalancing is not required when minor changes to your portfolio occur. Otherwise, we’d be rebalancing our portfolios every day, which is time consuming and expensive. Complete a rebalancing review of your portfolio:

  • If you remove/add a significant amount of money from/into your portfolio
  • If a significant change occurs (such as 2008 stock market crash)
  • Annually, as part of your annual review

Use the Portfolio Rebalancing Considerations worksheet to help you determine if changes to your portfolio are needed. 

When the Target (Asset Mix) Is Out of Range

Is your current asset mix on target with your target mix? Consider the overall investment portfolio and not the individual investment accounts. A simple rule is to rebalance when the current asset mix has ranged more than ±5% from the target asset mix.

Rebalancing Ranges

Take a look at four model investment portfolios; their target asset mixes and suggested rebalancing ranges.

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Rebalancing Made Easy

In order to rebalance your portfolio, take a look at each investment account statement. Compare the current asset mix pie chart to that of your target asset mix/investor profile. Do they match? If not, rebalancing is needed. You have three ways to rebalance. They are as follows.

  1. By buying and selling investments.
  • Sell off enough investments in overweighted asset classes (those that made money) to reduce the allocation back to its target.
  • Buy investments in underweighted asset classes (those that didn’t make money or lost money) to increase the allocation back to its target.
  1. By redirecting your new contributions.
  • If you are emotionally unwilling to rebalance (such as after the stock market crash in 2008 reduced equity allocations below their targets).
  • Allocate new contributions into the underweighted asset classes to gradually increase the allocations over time.
  1. By using a combination of both.

Buy Low, Sell High

This scenario is depicted in the pie charts below. The portfolio had a starting balance of $100,000. A year later, poor economic conditions caused the portfolio to lose $20,000 in equities which means fixed income has risen from 40% to 50% of the portfolio. To rebalance back to your original targets, you sell a portion of your fixed income investments and redirect the funds into buying more equity investments. By rebalancing your asset mix, when economic conditions improve, the portfolio will recover its losses faster than if you had made no changes at all.

Planning Tips

  • Periodically complete an asset allocation/investor profile questionnaire to determine if your target asset mix is still appropriate or requires adjustment.
  • Get to know your target asset mix. Memorize it. Always compare it to the current asset mix pie charts on your investment statements.
    • Work with your advisor to align the two. If you are a do-it-yourself investor, then this is a job for you.
    • Consider using pre-built balanced or target date funds if you want funds that are automatically rebalanced.
  • Never assume that target asset mix/investor profile allocations between different asset mix tools/questionnaires, investment firms or advisors will be the same.
  • Never assume that all balanced and other pre-built portfolio funds have the same asset allocations. They do not. Review fund investment reports to compare.

When Do I Rebalance?

Are you smarter about rebalancing? Find out. Take the quiz.

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