When you start investing, you go in with a plan about how you want to allocate your portfolio, but as the market moves, your portfolio can move with it—leaving you with a different allocation of stocks and bonds than you wanted. Rebalancing is a key part of keeping your portfolio on track, and avoiding it can lead to serious changes in your investment portfolio.
That’s when it’s time to rebalance by selling some investments, and buying more of others, to get back to your ideal mix.
Why rebalancing is important
A large investment firm recently did a study on two portfolios that would be considered “moderate” risk, with 60% equities (stocks) and 40% bonds. As a refresher, equities tend to be higher risk with higher expected return. and bonds tend to be lower risk, with lower expected returns.
One of these portfolios was rebalanced every month, so it kept a steady mix of 60% equities and 40% bonds over time. The other portfolio was never rebalanced. If you’re wondering how far it could possibly get from the ideal balance of 60/40, the answer is “very far.”
Eventually, the never-rebalanced portfolio was made up of 99% equities and 1% bonds! That’s a significantly different and much riskier portfolio than the one you started out with.
Also, as you get closer to the time you’ll need to withdraw funds from your account, you’ll want to consider rebalancing your portfolio to carry even less risk. This is a proactive, defensive measure to preserve what you’ve earned.
How to rebalance your portfolio
So what’s an investor to do? There are a few options available to you to rebalance your portfolio, depending upon the type of investor you are.
If you’re buying and selling investments on your own, choose a set time to look at your portfolio every year and rebalance it back to your original plan. You can go with monthly, quarterly, or annually. There are tax implications and costs to rebalancing, so be sure to pick a regular cadence that works for your situation.
When it’s time to rebalance, you’ll need to sell the investments that have grown to represent too much of your portfolio and use the proceeds to buy the investments that need to be bumped up.
2. Automated portfolio
Many investment companies offer automated portfolios that are customized to your financial goals, risk tolerance and timeline as to when you’ll need the funds. As such, the rebalancing will be maintained for you on a set schedule for your desired portfolio mix.
Although an automated account is something of a “set-it-and-forget-it,” life isn’t. Things change. Jobs change. Goals change. So, it’s always a good idea to check in on it to make sure your portfolio is aligned with your current lifestyle and risk tolerance.
3. Financial advisors
You always have the option of working with an experienced financial professional. A professional can look at your portfolio and make sure it’s working for and towards your goals. It can be a one-time consultation or an ongoing working relationship to help you plan your overall investment strategy.
It’s important that whomever you choose to work with is a “fiduciary.” By definition, a fiduciary manages your assets on your behalf and is legally required to act on your behalf.
Financial planning and investment advice provided by John Hancock Personal Financial Services, LLC (“JHPFS”), an SEC registered investment adviser. Investments: not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss. Nothing on this site should be construed to be an offer, solicitation of an offer, or recommendation to buy or sell any security. Before investing, consider your investment objectives and JHPFS’s fees. JHPFS does not provide legal or tax advice and investors should consult with their personal legal and tax advisors prior to purchasing a financial plan or making any investment.