How Often Should You Rebalance Your Portfolio?
They say that a watched pot never boils, but even a master chef needs to check the stove from time to time. Like the perfect dish, an investment portfolio should be well balanced and carefully observed to become something really satisfying. But just like with food, too much meddling can wreak havoc on investments.
Why Rebalance Your Portfolio?
As you probably know, almost everything needs some review and maintenance to keep them in good working order. That’s true for your car, your washing machine and your computer. An investment portfolio is no exception. You can leave investments alone. However, they’ll naturally run off track as some investments grow faster than others. Your overall portfolio could become misaligned. And that could expose you to more risk than with which you’re comfortable.
Here’s a hypothetical example: If you set yourself up with a traditional 60% stock, 40% bond portfolio in 2009 and left it alone, in 2022 that portfolio could have potentially shifted to about 85% stock and 15% bond—way off-balance from your original allocation.
You might have intended to be a moderate investor in 2009. But let’s say your stocks outperform your bonds over the years, increasing in value and proportion in your portfolio. In that case, your unbalanced portfolio will likely have taken on significantly more risk in more than a dozen years later. And by now, you’re probably closer to retirement and likely even less interested in a riskier portfolio.
Rebalance Your Mix
Rebalancing in Action
Original Allocation: For example, you may have decided to allocate 60% of your portfolio to stocks and 40% to bonds.
Out of Balance: If market activity causes the value of your stocks to increase, you’ll have a greater percentage invested in stocks, leaving you exposed to more risk than you intended.
Rebalanced: Rebalancing—buying more bonds and selling stocks—gets you back to your original 60/40 mix.
Keep in mind that this doesn’t mean you made a mistake to begin with. A portfolio falling out of whack is natural. That’s especially true when you invest in a mix of growth and value holdings .
How Often Should You Rebalance Your Portfolio?
Once you understand why you need to rebalance your portfolio, your next question is probably how often you should rebalance it.
Review your overall portfolio annually at a minimum. That means setting aside time with your financial professional for a deep dive into your investments.
An annual deep dive could reveal that it’s a time to make changes based on your personal risk level, shifts in the market and your consultant’s expertise. However, there’s a difference between “watching” a portfolio and actively rebalancing it. Just because you’re watching the market doesn’t mean that you’re going to get the outcome you want.
Will a portfolio perform better if you balance more often? Not necessarily. Investing is a long-term approach to help achieve your goals, so keep a long-term perspective of your portfolio too. Switching up a portfolio too often may derail it from what you want it to accomplish.
A long-term retirement portfolio doesn’t need checking every day. It’s all about the long game, not the day-to-day moves. If anything, too many check-ins can waste an investor’s time, energy and even emotions.
Also consider that a certain amount of portfolio drift will occur, and that can be OK, especially if it helps you avoid the pitfall of watching your investments all the time. Too much scrutiny can lead to unnecessary worry and anxiety. The most significant risk to “overbalancing” is the stress it can bring from being too sensitive to market fluctuations.
How Should You Rebalance Your Portfolio?
During your portfolio review, there are a few key ideas to keep in mind:
- Timing. Has the timing you’ve planned for your portfolio changed? Are you on track to retire sooner or later than you anticipated? Do you plan on using non-retirement investments in the near future?
- Savings goals. Have your investment objectives changed? Are you hoping to save more for retirement, your children’s education or perhaps a property? (Our calculators may help you adjust to meet new goals, if you need to.)
- Risk tolerance. How much risk are you comfortable with? Has that changed in the past year?
Working through these questions can help you rebalance your portfolio. And it may also help inform the investment strategy you use going forward.
Your annual portfolio rebalancing should be more than just a look at the numbers. It ought to be an opportunity for you to revisit everything from your overall financial situation to what the stock market has been doing during the past year.
Do You Need Help Rebalancing Your Portfolio?
Rebalancing on your own can be a challenge. You may even overlook market trends or personal insights that could benefit your investing future. That’s why working with a financial professional can come in handy.
It’s a financial professional’s job to focus on your investments, what’s happening in the markets and what trends may be occurring. They have the time and training to consider what may be suitable for each situation, day in and day out.
Yes, it’s still important to let investments grow untouched. But just as a chef tastes the soup every so often to make sure it’s perfectly spiced and blended, an occasional rebalancing can help your portfolio align more closely with your future financial goals.