Rebalancing your portfolio can help you stay on track to meet your financial goals. But when is the right time to rebalance? Learn more about this key investing tactic.
First, what is a balanced portfolio?
To understand the how and when of rebalancing, it makes sense to first understand what a balanced portfolio is. In a nutshell, it means a portfolio with an asset allocation that is in line with your financial plan, which includes your financial goals, your individual risk tolerance, your time horizon, and so on.
What does it mean to rebalance your portfolio?
A portfolio doesn’t remain in a balanced state on its own. Certain market events (like fluctuation in stock values) will throw a once-balanced portfolio out of whack over time. This is a normal and natural part of investing.
For example, let’s say that your financial plan indicates an asset allocation of 60% of your portfolio in stocks, and 40% in bonds. If the stock market’s value grows significantly while the bond market stays about the same, the stock allocation in your portfolio will have grown, nudging your portfolio out of balance.
The goal of rebalancing is to restore your portfolio to its optimal proportions of risk and return potential and get your portfolio back on track with your long-term financial strategy (again, this is dictated by your financial plan).
This is typically done by selling certain investments and buying others, or by adjusting your asset allocation to include more or fewer stocks or bonds.
When should portfolio rebalancing happen?
Rebalancing can essentially be done on one of two timetables: One, rebalancing at predetermined time intervals (such as at the first of the year). Or, two, rebalancing when your allocations have deviated a certain percentage from your optimal mix.
Rebalancing at a predetermined time interval, like once or twice a year, is the approach of many investors, who handle this on their own. While this approach can be just fine, many investors prefer to have their wealth advisor take the reins on rebalancing, because the advisor knows exactly what’s going on with market and economic conditions and can take the best strategic approach.
Your advisor will not just know what to do to keep your portfolio in line with your plan, but will also know when is the right time to do it. What’s more, putting your advisor in charge means that you won’t be tempted to make emotional, reactive decisions about buying and selling.
In the end, it’s less about “when” and more about a strategic approach that keeps your portfolio where it needs to be so that you can stay on track to reaching your financial goals.
Looking for a personalized approach to wealth management or have more questions about asset allocation and rebalancing your portfolio? We can help. Contact Ironwood Wealth Management to get started today.