Rebalancing Your Portfolio Over Time

Rebalancing Your Portfolio Over Time

If you are like most people, when your investments are doing well, you probably want to stick with them as is. But is that best for the balance of your portfolio? Your portfolio’s balance is subject to shifts based on your risk profile because of how your investments perform. You consulted a retirement planning advisor to set up your portfolio with the right balance, hoping to retire comfortably. But what happens over time if you do nothing?  Could this undermine your portfolio’s balance and intent?

Initial Portfolio Balancing

In the beginning, you met with your retirement planning advisor. You decided how to allocate your investments by considering your time horizon, risk tolerance, and some specific goals. Then, your advisor selected individual investments to help you pursue your overall investment objective. 

If all those investments performed exactly the same over the years, your portfolio would remain perfectly balanced as the allocation remained steady. But when investments have various returns, your portfolio ends up bearing little resemblance to the original intent and balance as time goes on.

Rebalancing Basics with your Retirement Planning Advisor

Rebalancing restores your portfolio to the original risk profile or to a new risk profile based on your current situation. You can rebalance your portfolio in two ways.

Inject New Funds for Rebalancing

You can inject new money into your portfolio. When you add money to rebalance, you allocate the new funds to assets that no longer make up the same percentage of your portfolio. For example, if bonds used to make up 40% of your portfolio, and now they only make up 30%. Then you could consider purchasing bonds to get back up to the original 40%. Diversification as an investment principle manages risk, but diversifying your portfolio doesn’t guarantee against a loss.

The second way to rebalance your portfolio is by selling enough of the top performers to buy more of the underperforming assets. So, if your bonds went from 30% of your portfolio to 40%, you would sell them and buy something else that had not done as well. This rebalancing enforces buying low and selling high as a strategy.

A periodic rebalancing of your portfolio to match a specific desired risk tolerance makes sense regardless of market conditions. Savvy investors set a time annually to meet with their Retirement Planning Advisor to review their portfolio and determine the appropriate adjustments.

Shifting Allocations

Over time, market conditions frequently change the risk profile of investment portfolios. For example, imagine on June 1, 2010, an investor developed a portfolio with a 50/50 mix of stocks and bonds. By June 1, 2020, the mix would change to 67% stocks and 33% bonds if left untouched.

As a result, the investor would need to rebalance the portfolio by either investing more money in bonds or selling enough stocks to buy more bonds. As counterintuitive as it may seem, this creates a buying low and selling high strategy that works well in the long-term. 

Talk to your retirement planning advisor about how your portfolio has shifted over time. And discuss in detail what adjustments are appropriate to get you and your finances back on track.