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Ask The Financial Doctor > Rebalancing: When, Where, and (most importantly) Why?

Rebalancing: When, Where, and (most importantly) Why?

11/27/2017 7:35:00 PM by Morgan Wendlandt Edited for Chuck Price Leave a Comment
When it comes to your risk tolerance, you may have decided a few years ago to invest a large percentage of savings in stocks and remaining percent in bonds. Over time, these different portions grow at different rates, and can knock off the original balance between the two. A new study from Wells Fargo and Gallup discovered that this is likely the case for the majority of investors, as less than half bother to rebalance their portfolios and match their target mix to their risk tolerance at least once a year.

This is dangerous because not rebalancing may lead to an even larger percentage of your savings going into stocks and a lower percent going into bonds. This means you are sitting on a more aggressive portfolio than you initially intended. If you are experiencing losses in your equities, you may end up with a much larger loss than expected simply because you did not rebalance. A larger-than-expected setback like this can lead to a sell-off of much of your stock, which can completely rattle your long-term investing strategy. All in all, this could result in you having far less money in your retirement fund.

Rebalancing is a method for making sure your investment portfolio stays in line with your goals. Here's an example. Let's say in 2008 you invested 60 percent in stocks and 40 percent in bonds. In 2009, however, you endured a 27 percent loss in stocks while enjoying a 6 percent return for your bonds. This means you would need to switch up your portfolio so that a larger percentage of your investments were going into bonds and a lesser percentage in stocks.

Annual Rebalancing

Now that you can see why rebalancing is so important, the question you should ask yourself is 'how often should I rebalance?' Truth is, there is no set-in-stone period for rebalancing; however, it is often advised that annual rebalancing is the best move to make. If you are taking on a very complex investment strategy, quarterly or monthly rebalancing may be an even better fit.

Many investors don't have the discipline or time to rebalance their investments on a frequent basis, which is often why annual rebalancing seems to make the most sense. Annual rebalancing helps decrease the transactions costs along with the taxes that you might incur from having to sell certain stocks and bonds in an attempt to get your portfolio back to an appropriate proportion. Remember, during years that your investments are experiencing high gains, you may not have to make any changes to your portfolio. Still yet, it is best to carry out a rebalancing strategy at least once a year to see if any changes need to be made. It's better to be aware that no changes are needed than to be unaware of them and not make them.

Automatic Rebalancing

You want to rebalance your investment portfolio, but you simply don't have the time or knowledge to do it. Now what? Fortunately, you can take advantage of automatic rebalancing. This type of rebalancing can come at the hands and mind of someone else, such as an investment specialist. If your investment portfolio includes a 401(k) plan, there is a good chance that you have the option to take advantage of automatic rebalancing. There are also online tools you can use that enable you to perform a rebalance with a click of the mouse. If you want an even more precise form of rebalancing, consider working with an investment specialist.

No matter the method for rebalancing that you choose, remember that as you get closer to retirement, you will likely want your portfolio to become more conservative to help protect the savings that you have acquired over the years. You don't want to endure a major setback right before you plan to retire. Never just let your retirement strategy ride. Instead, rebalance at least once a year, and use an investment specialist as much as possible.

Prepared by Chuck Price in conjunction with Fusion Capital Management.
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