Rebalancing Your Portfolio: Why, When, and How to Do It

Rebalancing your portfolio by restoring it to your target allocation can help manage risk and keep your investment plan on track. Here are a few things to know about rebalancing.

Why rebalance your portfolio

Ups and downs in the market can cause the proportions of stocks, bonds, and other investments in your portfolio to stray from your target allocation. For example, what started out as 60% stocks and 40% bonds may now be 70% stocks and 30% bonds if stocks have performed well recently. An increase in the proportion of stocks in your portfolio generally means that your portfolio now has more risk than you intended when you chose your target allocation. Alternatively, if stocks have performed poorly and the proportion of stocks in your portfolio has decreased, your portfolio may have less potential for growth than you had planned on. Rebalancing your portfolio – that is restoring it to your target allocation – can help bring it back into alignment with your tolerance for risk and desire for growth.

When to rebalance

One strategy is to pick a date and rebalance every quarter or year on that date. Another strategy is to rebalance only when proportions in the portfolio have strayed by a predetermined amount, such as 5 or 10 percentage points. Some investors combine the strategies and review their portfolios on set dates, but only rebalance if their actual allocations have strayed from their target allocations by a predetermined amount.

How to rebalance

One way to rebalance your portfolio is to sell some investments in the overweighed asset class and invest in proceeds in the underweighted asset class until your target allocation is restored. Another way is to direct new money you invest into the underweighted asset class until your target allocation is reached. If you decide to sell some investments, be sure to consider the potential impact that the sale of those investments may have on your taxes.

Please consult with us for professional advice that pertains to your specific situation.

With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success. 

Article published in November 2020 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.