Investment portfolios are built to help you reach your goals. We’re always working to maximize returns while taking on only as much risk as you’re comfortable with. We do this by combining different assets, like stocks and bonds, in different ways. However, these combinations can get out of balance.
That’s because different investments all perform differently – they’re designed to. This means that the balance of assets can shift in a way that no longer reflects your goals or risk tolerance. This is where rebalancing comes into play.
In real life portfolios, there are more considerations than just stocks and bonds. You’re also thinking about types of stocks, types of bonds, alternative investments, and more.
That said, many clients (and investors in general) tend to get overly focused on the details. They look at the performance of individual stocks or want to rebalance any time there’s a big market move.
But that’s not the goal of rebalancing. Unless you have a very short time horizon, rebalancing once a year is all you need. It’s important to remember that the goal is to keep your investments aligned with your risk tolerance, not to beat the market each quarter.
If you manage any of your own investments — like a 401(k) through work — check your account once a year and consider rebalancing if the balance of your investments (the percentage of stocks, bonds, etc.) shifted. Or, check to see if your plan administrator allows you to set up your account so it automatically rebalances once a year.
Do you still have questions about rebalancing in general, or how it applies to your portfolio? Set up an appointment to discuss.