Portfolio rebalancing allows your holdings to change with the market environment. Consider a portfolio with a target mix of 60% stocks and 40% bonds. If the market is favorable to stocks, you might increase your stock holdings. However, if stock holdings inch up toward 70%, you might want to consider rebalancing again. This approach lets the market have some volatility but identifies when it has reached an extreme for you.
Market volatility might warrant rebalancing, but you should avoid overreacting to media reports about unsteady markets. Treat these reports as a chance to spark a conversation with your financial professional.
Rebalance your portfolio when you experience major life events
- You’re approaching retirement
- You’re expecting a child
- You’re buying a house
- You’ve experienced a major health event
Major life events might compel you to check in on your investments and rebalance 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 never hurts 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 return perspective, it may be wise to invest any windfall fully and right away, rather than waiting or investing over the course of a year or two.
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, rebalancing can help you ease into an entirely redesigned portfolio tailored to your new needs.
Rebalance your portfolio 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 the key to a well-performing portfolio. If you have a sneaking suspicion that your portfolio isn’t well diversified, it might be time to talk 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.
Rebalance your portfolio 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 your investments for a while
Quite simply, if you haven’t rebalanced your portfolio lately, you may want to initiate a conversation with your financial professional about rebalancing. 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.
Checking in on your investments regularly can help you decide when to undergo a portfolio rebalance and stay up to date on your portfolio’s performance. This method takes some of the emotion out of the investing process and can help you invest dispassionately, rather than react to market fluctuations.
Does portfolio rebalancing include costs?
There are plenty of benefits to rebalancing your portfolio, but it’s also important to note the transaction costs. If you’ve had just a small deviation around 1% or 2% from your desired target mix, the transaction costs might outweigh the benefits.
Rebalancing your portfolio with a financial professional
A financial professional can draw on experience and analytical tools to help ensure rebalancing activity is appropriate for your situation. 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. Knowing when to rebalance your portfolio can help ensure your money is working as hard as you are.
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