How rebalancing can help you stay the course

When markets become turbulent, 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, periods of market volatility 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 we 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 bringing your investments back into alignment with your long-term strategy.

Rebalancing is necessary because, over time, each asset class behaves distinctly. If left unattended, your portfolio may evolve to look very different than you planned for. As a result, you might find your portfolio is riskier than you are comfortable with, or you could find it lacking the return potential necessary to meet your long-term objectives.

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 did in the initial weeks of COVID — 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 have been for much of the last fifteen years — rebalancing could mean taking profits (selling some of your stock investments to reap gains along the way) and redeploying those dollars into positions that are perceived to be safer, like bonds or cash.

Your instinct may be to sideline assets when markets are rough or to become more aggressive when markets have been good. Rebalancing can help you fight the emotions spurred by market swings and help you avoid emotional decisions that can derail progress toward your long-term goals.

How often should you rebalance your portfolio?

There are no hard and fast rules around how often to rebalance, in our view the key is that your portfolio keeps invested in a combination you are comfortable with and meets your needs. 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.

Together, we can develop a plan to keep your investments aligned with your goals also taking into account whether your portfolio resides in a taxable or tax-sheltered account, as rebalancing 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.

Could your portfolio benefit from rebalancing?

Reach out to us to schedule a meeting today. We’ll review your investment mix and determine if rebalancing makes sense for your situation. If it does, we’ll develop a personalized rebalancing approach to bring your asset allocation back in line with your long-term financial goals.