The Purpose of Portfolio Rebalancing: What, Why, When?
By Katie Bruno, CFP®, CDFA®, MIMFA Financial Planner
Portfolio rebalancing is an important component of investment management.
When you first start investing, you determine the most appropriate investment for you based on your goals, risk-tolerance, and time horizon. An asset allocation is selected for you based on this collective information.
An asset allocation is the mix of investments that you own such as stocks, bonds, cash, and real estate. Each asset class may have a different impact on your overall performance. Someone who is willing to take more risk and has a greater length of time to meet their financial goals may have a higher allocation to historically risky or volatile investments such as stocks. On the other hand, an investor who is risk-averse might have more bonds or real estate in their portfolio.
When you choose an investment strategy the portfolio should remain aligned with the objective, unless something changes. If an asset allocation is left to change and drift with the swings in the markets, the profile of the strategy will drift out of line with what was originally determined to be best-suited. Typically, more volatile, or risky, assets come with higher returns which potentially lead to those asset classes growing at a faster rate than the less volatile assets. For an investor who is closer to their goal, such as retirement, the asset allocation could be too aggressive especially if the market were to experience a correction.
When it’s time to rebalance, here are some factors to consider:
1. How often should you rebalance?
One strategy is to choose a rebalancing threshold. This means choosing to rebalance your portfolio when the asset allocation drifts too far away from the target allocation You choose a percentage that represents how far your assets can move from the original allocation. One might rebalance their portfolio when the assets are 5% or 10% off from the target allocation.
2. Choosing a Time Period
Another rebalancing approach is to choose a time period. How frequently you choose to rebalance may depend on your investment goals. You can rebalance periodically, such as quarterly or a couple of times a year. Rebalancing too frequently or in reaction to the economic environment can be dangerous if you are paying a lot in fees or taxes.
3. Avoid Emotional Investing
When holding onto a rising asset class such as stocks sounds ideal, there is a downside. If you have a larger allocation than you originally planned and the market goes into a correction, you will likely experience a larger drop in the value of your portfolio. This could lead you to become nervous and uncomfortable. This is when the behavior component enters. Nervous investors tend to sell in a panic and that could lock in losses since you are selling stocks at a lower price. This makes it more difficult for the portfolio to get back to even when the market goes back into rally mode.
At Morey & Quinn Wealth Partners, we understand the importance of your investment portfolio and finding the right balance between risk and stability based on your unique situation. Whether it’s time to rebalance your existing investment portfolio or start a portfolio, we’re ready to partner with you for a life well planned. Contact us today to get started.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Phone: 402.502.9900
Toll Free: 877.541.6593
11225 Davenport St, Suite 109
Omaha, NE 68154
Any opinions are those of Katie Bruno, CFP®, CDFA®, MIMFA, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.
Rebalancing a non-retirement account could be a taxable even that may increase your tax liability.
Schedule a free consultation to learn how our experience and guidance can help.
Morey & Quinn Wealth Partners
Raymond James® LIFE WELL PLANNED.
Phone: 402.502.9900
Toll Free: 877.541.6593
11225 Davenport St, Suite 109
Omaha, NE 68154
Additional Blog Posts
« 7 Ways to Maximize an Inheritance 8 Questions to Ask Your Financial Advisor »