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.
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.
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:
Use the Portfolio Rebalancing Considerations worksheet to help you determine if changes to your portfolio are needed.
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.
Take a look at four model investment portfolios; their target asset mixes and suggested rebalancing ranges.View
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.
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.
Are you smarter about rebalancing? Find out. Take the quiz.Begin Quiz