The wisdom of an investment rebalance — especially now


David Joy, Chief Market Strategist – Ameriprise Financial

Many investors think about their portfolio volatility when falling stock prices dominate news headlines. However, we believe now is a good time — given continued rising stock prices — to talk with your Ameriprise financial advisor about your investment mix. Here’s why.

As it relates to portfolio volatility, one essential concept to manage risk is portfolio rebalancing. In simple terms, you strategically move money among the various assets. This is necessary because, over time, each asset class behaves distinctly.

  • Some stocks or bonds, for example, may enjoy a period of strong returns, while others lag.
  • If left unattended, a portfolio may evolve to a very different risk profile compared to your original approach.
  • Depending on your goals, this might mean you have too many stocks and too few bonds (or vice versa).

Recent market experience offers a good example. Let’s assume a simple portfolio was evenly divided between broad indices of U.S. stocks and bonds at the start of 2020. It wasn’t long before pandemic-induced volatility in the first quarter of 2020 resulted in the swiftest bear market — and subsequently the fastest stock bull market in history. By the end of May 2021, the stock index would have risen 30% and the bond index by only 5%.

That portfolio would now consist of 55% stocks and 45% bonds, a material drift away from the 50-50 starting point and with a significantly higher volatility profile (given more stocks, which are riskier than bonds). And because stock returns have historically exceeded bond returns, the drift away from the original allocation will further intensify over time.

Of course, no investor would be upset if their portfolio overall had done quite well. And psychologically it may be difficult to sell stocks when prices are in an uptrend. But the discipline of periodic rebalancing is designed to maintain the risk profile you’re comfortable with and increase the likelihood you remain invested. Building wealth requires a focus on investment objectives over time, without temptation to exit the stock market when prices decline for periods of time.

There are no hard and fast rules around how often to rebalance.

  • Some investors rebalance annually, on a pre-determined date such as the start of the year.
  • Others rebalance quarterly.
  • Whether a portfolio resides in a taxable or tax-sheltered account may have a bearing on the frequency as it could result in a taxable event.
  • Another approach is to rebalance when asset weightings exceed a +/- 5% threshold, for example.

Regardless of one’s risk tolerance, maintaining the discipline of portfolio rebalancing can help all investors stay focused on their long-term goals. Contact your Ameriprise financial advisor to learn more about how rebalancing can help you.