Rebalancing your portfolio is a healthy exercise that has multiple benefits if done correctly, but wrong decisions can lead to higher exposure to risk. Here’s how to rebalance your portfolio the right way with APO Financial.
You’ve probably heard the term rebalance. You may even have a vague idea of what it is and what it is supposed to do. But have you wondered how it works, and do you know the right way to do it?
Balancing your portfolio means constructing a portfolio that fits your individual risk tolerance and investment goals. But this isn’t a one-and-done task that you can wipe your hands of at the end of the day. You need to ensure your portfolio stays balanced, which is called rebalancing. Let’s take a closer look at what it means to rebalance a portfolio and how it can impact your risk and returns.
Why is Rebalancing So Important?
If you’re wondering what portfolio rebalancing is and why it matters, you aren’t alone. Many investors overlook this component of building an investment portfolio that serves their interests for the long-term.
When you first hear the term “portfolio rebalancing,” you may imagine an intricate financial balancing act. And that assumption is not too far from reality. Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state. In addition, if an investor’s investment strategy or tolerance for risk has changed, they can use rebalancing to readjust the weightings of each security or asset class in the portfolio to fulfill a newly devised asset.
Rebalancing acts as a counterbalance to what is going on in the markets and is used to bring you back in line with your long-term investment strategy, while aiming to reduce the risk of not achieving your goals. For example:
- When stocks (equities) are falling in value, rebalancing could mean moving money out of safer assets (like cash) and adding to your portfolio’s stock exposure.
- When stocks are rising — as they have been for much of the last decade — rebalancing could mean taking profits (selling some of your stock allocation to reap gains) and redeploying those dollars into perceived-safer positions, like bonds or cash.
Why is rebalancing important? Over time, your asset mix will fluctuate with the ups and downs of the financial markets. Unknowingly, the risk level in your portfolio may drift away from your target. Key benefits to remember include:
- Rebalancing forces you to take profits from investments that have run up and put money in things that have merit but haven’t gone up.
- Rebalancing gives you the opportunity to review all of the mutual funds in your portfolio.
- Rebalancing can smoothe investment returns.
- Regular portfolio rebalancing helps reduce downside investment risk and ensures that your investments are allocated in line with your financial plan.
The Case Against Rebalancing
While it’s important to review your investments on a regular basis, making changes to your portfolio to rebalance is not always necessary and ultimately depends on your age, goals, income needs and comfort with risk. In fact, sometimes rebalancing may do more harm than good, especially if done too often. But keep in mind, as you get older, not rebalancing may lead you to take on more risk than you realize, and if the worst happens, you won’t have time to recover those losses.
It’s also worth noting to be aware of potential taxes and fees. Rebalancing can trigger transaction fees if the holdings you need to buy or sell trigger these fees. This could apply to trading stocks or ETFs, or to mutual funds that carry a transaction fee. If your mutual fund carries a surrender charge, this could trigger if you decide to sell a portion of the fund in the rebalancing process.
How to rebalance your portfolio
As mentioned, it’s important to understand that rebalancing is not a one-off exercise. You should have a rebalancing strategy that might consist of rebalancing your portfolio multiple times each year or every year or two. Here is a potential framework to help you define your rebalancing strategy:
- Set a Target Asset Allocation: Choosing the right asset allocation involves weighing not only how long you have to invest but, perhaps more importantly, your appetite for risk.
- Determine your portfolio’s current allocation: Once you know your ideal asset allocation, figure out where your investments currently stand. Whether you use a spreadsheet or an app, you’ll arrive at a difference between your existing allocation and your ideal.
- Buy and Sell Assets: Sell off investments that are overweighted in assets you want to reduce and buy investments in asset classes you want to increase.
- Review Your Asset Allocation at Regular Intervals: Set a regular time frame in which to review your portfolio’s asset allocation. Many experts recommend doing this no more than every three months, others suggest that semi-annually or even annually is sufficient.
Let APO Financial Help
Essentially, rebalancing will help you stick to your investing plan regardless of what the market does, helping you to stick to your risk tolerance levels. Rebalancing is sometimes hard to do if you are reliant only on yourself to do it. Either it falls through the cracks because you are too busy, or emotions get in the way. That’s where we can help.
At APO Financial, we believe a strategic approach to investing can help you maximize your retirement income while minimizing your investment taxes. Our job is to help you mitigate risk through proper planning and tactical asset management with the goal of protecting and growing your hard-earned nest egg.
Investors should make a plan for how and when to rebalance their account and set necessary reminders to do it! APO Financial is here to help, so do not hesitate to contact us with any rebalancing questions.
Investment advice is offered through APO Financial Services, LLC. Insurance and fixed annuity products are offered through our affiliates, Asset Protect One, Inc. and/or APO Financial Services, Inc. No persons associated with APO or its affiliates is a licensed attorney or tax professional and nothing on this Page should be considered tax or legal advice.
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