When markets turn down, as they have so far this year, it’s not uncommon for investors to question the long-term investment strategy they developed with their financial advisor when times were quieter.
Though the natural inclination may be to lean away, down markets are an especially important time for investors to lean into the long-term plan that was built to weather these storms.
And one way to do that is through rebalancing your portfolio, an exercise that your Ameriprise financial advisor can oversee, in consultation with you.
First, what is rebalancing?
When it comes to your long-term investment strategy, portfolio rebalancing is essential to managing risk. In simple terms, rebalancing is the systematic movement of money among the various assets in your portfolio to bring your investments back into alignment with your long-term strategy.
Rebalancing is necessary because, over time, each asset class behaves distinctly. If left unattended, a portfolio may evolve to a very different risk profile than you planned for. As a result, you might find your portfolio has too many stocks and too few bonds (or vice versa).
How does rebalancing work?
Rebalancing acts as a counterbalance to the movement in the markets and can bring your portfolio back in line with your long-term investment strategy. For example:
- When stocks are falling in value — like they have been this year — rebalancing could mean moving money out of safer assets (like cash) and adding to your portfolio’s stock exposure, which may boost performance when markets turn around.
- When stocks are rising — as they had been for much of the last fifteen years — rebalancing could mean taking profits (selling some of your stock investments to reap gains) and redeploying those dollars into positions that are perceived to be safer, like bonds or cash.
In both cases, you are fighting instincts to sideline assets when markets are rough or become more aggressive when markets have been good. Rebalancing can be a valuable tactic when market swings evoke emotion and, subsequently, emotionally-driven decisions that can derail progress toward your long-term goals.
Why consider rebalancing in the current market environment?
The recent market declines, while painful, present a good opportunity to understand how rebalancing can help an investor stay the course:
Consider this example:
Let’s assume a simple portfolio evenly divided between broad indices of U.S. stocks and bonds at the start of this year. Given the market declines, this investor now sits at 47% stocks, a small but potentially meaningful difference from where they started should markets move higher during their investment horizon
Assume the same investor started their evenly split portfolio at the end of the Global Financial Crisis in 2009 (rather than at the end of this past year). Over these 15+ years, stocks had moved broadly higher, outperforming bonds along the way. However, if the investor did not make the difficult decision to fight their instincts and rebalance, they would have found themselves with a portfolio comprised of 85% stocks and exposed to significantly higher risk to begin this challenging year.
Not surprisingly, investors are often comfortable letting their stocks become a more considerable portion of the portfolio when the markets trend upwards. The discipline of periodic rebalancing is less about return than it is about risk, though there are windows of time where it can add value on both fronts. Rebalancing, at its core, is designed to maintain the risk profile you’re comfortable with and increase the likelihood you remain invested.
How often should you rebalance your portfolio?
There are no hard and fast rules around how often to rebalance. Here are options to consider.
- Some investors rebalance on a pre-determined schedule, such as annually or quarterly.
- Others choose to rebalance when asset weightings exceed a threshold, such as +/- 10% from their strategic target.
- Others yet combine the first two approaches, checking their account on a schedule and only making changes if they exceed a threshold.
- 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.
Bottom line: Rebalancing can help you reach your financial goals
Building wealth requires focusing on investment objectives over time and avoiding timing mistakes that could throw your portfolio off track. Regardless of one’s risk tolerance, maintaining the discipline of portfolio rebalancing can help investors stay focused on their objectives, which is particularly important in today’s environment.
Could your portfolio benefit from rebalancing?
Reach out to your Ameriprise financial advisor to schedule a meeting today. They’ll review your investment mix and determine if rebalancing makes sense for your situation. If it does, they’ll develop a personalized rebalancing approach to bring your asset allocation back in line with your long-term financial goals.