4 times to consider portfolio rebalancing

Whether an active or hands-off investor, rebalancing your portfolio should play a key role in your long-term investment strategy.

Tags: Investments, Investing, Portfolio management
Published: May 27, 2020

What does it mean to rebalance a portfolio? And when is the right time to rebalance? Here’s a look at the benefits of rebalancing and four common situations that may trigger a portfolio reassessment.


Why rebalancing matters

Rob Haworth, senior investment strategist at U.S. Bank, defines rebalancing as a negotiation between risk and reward that can help your portfolio stay on track amid market highs and lows.

When you rebalance your portfolio, you’re making adjustments that can help you: 

  • Avoid overexposure to losses at the end of an “up” cycle. Rebalancing during a bull market, when prices are rising, allows you to reconsider the risks of remaining heavily invested in stocks. “I’ve seen investors get excited and avoid rebalancing because it would mean they’d make less money if the stock market keeps going up, but they ignore the risk side of that equation,” Haworth explains.
  • Stay on track toward goals even during poor market conditions. “After the financial crisis of 2008,” Haworth recalls, “a lot of investors said, ‘I don’t want to buy any more stocks.’ Yet, if they had rebalanced over that time period and brought their portfolio back in line with their longer-term goals, they would have been well-compensated for keeping stocks.”
  • Reassess your past behavior and adjust to meet the challenges of the current and emerging market environment. Rebalancing allows for “discipline and planning for the potential to create a more successful outcome than hoping, gambling, or letting it ride,” says Haworth. 

When should you consider rebalancing your portfolio? Here are a few situations that might trigger a conversation with your financial professional about rebalancing.


1. Rebalance when there is market volatility

  • Stocks are trending upward
  • Stocks are trending downward

According to Haworth, market volatility is one of the most common reasons investors look to rebalance. Volatility-triggered rebalancing can help monitor how far your portfolio has strayed from your target goals.

Haworth explains that you can work with a financial professional to develop “drift parameters,” to define the amount of volatility you’re comfortable with. “This is a mechanism to determine whether volatility should trigger rebalancing. If you’re having double-digit gains or double-digit losses, these are opportunities to rebalance,” he says.

Rebalancing allows your holdings to change with the market environment. Consider a simple portfolio made up of 60 percent stocks and 40 percent bonds. If the market is favorable to stocks, you might increase your stock holdings. However, if stocks holdings inch up toward 70 percent of your portfolio, Haworth says you might want to consider rebalancing again. “This approach lets the market have some volatility but identifies when it’s reached an extreme for you,” he says.

Though market volatility might warrant rebalancing, Haworth warns investors to avoid overreacting to media reports about unsteady markets. Rather than following the media’s advice, allow these reports to spark conversation with your financial professional.


2. Rebalance when you experience major life events

  • You're approaching retirement
  • You're expecting a child
  • You're buying a house
  • You've experience a major health event

Major life changes — such as having a child, buying a house, or transitioning to retirement — might compel you to check in on your investments and adjust as necessary. It’s possible you’re already pursuing a balanced, diversified investment strategy that works with your changing priorities. Even so, as major milestones approach, it might be beneficial to review your holdings.

Some life events may result in a sudden influx of cash for you to invest. For example, you may receive an inheritance after a family member passes away. “If there’s more money to invest, rebalancing becomes a part of the process. From a returns perspective, we advocate investing any windfall fully and right away, rather than waiting or investing over the course of a year or two,” says Haworth.

Some life changes can trigger a wholescale reevaluation of your financial goals. If something truly unexpected happens — such as a health crisis — you might need to do more than tinker with your portfolio. In these cases, Haworth says, rebalancing can help you ease into an entirely redesigned portfolio tailored to your new needs.


3. Rebalance when you have diversification concerns

  • You're concerned your portfolio isn't adequately diversified
  • You're considering adding a new asset class to your portfolio

Diversification is key for a well-performing portfolio. If you have a sneaking suspicion your portfolio isn’t well diversified, Haworth suggests talking with your financial professional about rebalancing.

Similarly, if you’re curious about new or emerging investment opportunities — such as international stocks or holdings in emerging technology companies — you might consider rebalancing your portfolio to incorporate these new assets.


4. Rebalance when you haven’t rebalanced in a while

  • It's been more than a year since your last rebalancing conversation
  • You've been distant or checked out from investing for a while

Quite simply, if you haven’t rebalanced your portfolio in quite some time, you may want to initiate a conversation with your financial professional.

According to Haworth, it’s a good idea to review your portfolio on a quarterly or annual basis. “This reassessment may not lead to any activity, but at least you’ll know you’re on track,” Haworth says.

Checking in on your investments regularly can help you stay up to date on your portfolio’s performance. Further, Haworth says, “This method takes some of the emotion out of the investing process.” This can help you invest dispassionately rather than react to market moves.


The costs of rebalancing

Though there are plenty of benefits to rebalancing your portfolio, it’s also important to note the related costs.

“There are transaction costs for rebalancing, and those are real costs that should be considered in the discussion about rebalancing,” advises Haworth. If you’ve had a small deviation from your target returns (1 or 2 percent), transaction costs often outweigh the benefits.


Rebalancing with a financial professional

When you’re ready to rebalance your portfolio, a financial professional can help you align your portfolio with your long-term goals.

A financial professional can draw on experience and analytical tools to help ensure rebalancing activity is appropriate. Haworth explains, “If the market is trending one way, but we don’t see fundamentals to support a turnaround in portfolio direction, we might actually discourage rebalancing.” Having this extra layer of analysis can help you feel confident in the moves you’re making.


In the end, rebalancing is a key practice for all investors. As Haworth puts it, “Rebalancing is one of those tools that can help ensure your money is working as hard as you are.”


When rebalancing your portfolio, don’t forget to diversify. Here are 7 diversification strategies for your investment portfolio.