If you manage your own portfolio, you probably fall into one of two camps:
Actively manage: Seeking out interesting opportunities, buying and selling over time.
Set it and forget it: Check on how things are doing, on a monthly or quarterly basis.
In either case, you should spend some time once or twice a year rebalancing your portfolio.
What Is Rebalancing Your Portfolio?
Rebalancing your portfolio is the process of reallocating the weights of your current investments, back into the weights of your original investment strategy.
How To Rebalance Your Portfolio
Step #1 - Determine your current asset allocation across stocks, bonds, cash and alternative investments.
This will require a little bit of work, because you may have to access multiple accounts. The goal should be to have all of your assets categorized and accounted for in one tool. The tool should then break out by percentages at a high level, the total for each asset class.
Step #2 - Review your investment strategy.
Your strategy should take into account your risk tolerance, your time horizon and your goals. Your strategy should not appreciably change from year to year. But there are instances where it could, and you should account for them. At a high level this could look like: 65% - stocks, 25% bonds, 10% cash.
“Believing that a presidential election could have adverse consequences to the stock market, is not a reason to change your “strategy”. ”
Step #3 - Compare your strategic allocation goals to your current situation.
Once you understand your current situation and you have affirmed your strategy, it is time to compare the two for alignment. Often, over the course of a year, one asset class will have changed compared to the others. This will cause the percentages to have drifted out of alignment.
Why allocate across Asset types? asset percentages drift.
For example, when stocks are rising, then bonds are likely dropping or staying level. When stocks are dropping, bonds are likely rising. The goal of your allocation is to provide diversification, and to prevent wild swings in your portfolio.
Step #4 -Diversify inside each Asset class
Typically you will want to diversify inside each asset class. For example, in stocks, you might want 50% in US large caps, 10% in US small caps, 10% in REITs, 20% in emerging markets and 10% in cash. After ensuring that your asset classes are properly balanced, you will then want to make sure that your investments are properly aligned to your diversification percentages.
How Often Should You Rebalance Your Portfolio?
Once or twice a year. You don’t want to rebalance too often, because you will spend more than you need on trading fees. You want to rebalance often enough, that if one asset class increased in value, you can reap the rewards by selling high, while reallocating into an asset class that will likely increase its value in the future.
Are you properly allocated? Are you diversified? Have you recently checked? Questions? Set up some time to analyze your portfolio with your financial advisor.
**PS, that is my nephew, Cooper Greer and Shaq. They are decidedly not “balanced”.