Why Rebalancing Your Portfolio Matters — and How to do It
In life, balance is everything — whether it’s finding time between work and family or maintaining a healthy diet. The same goes for your investments. Keeping your financial portfolio balanced is a smart way to stay on track toward your long-term goals, even as the markets shift. That’s where portfolio rebalancing comes in. Rebalancing is the process of adjusting your
investments — like stocks, bonds and cash — so they stay in the right mix for your needs. This mix, known as your asset allocation, is designed to reflect your comfort with risk, your investment goals and how long you have until you’ll need to use the money for a major life event like retirement or the purchase of a new home.
For example, let’s say your target portfolio is made up of 60% stocks, 30% bonds and 10% cash. Over time, as the value of each investment changes, your portfolio may become unbalanced.
If stocks have a great year and rise in value, they could end up making up 70% of your portfolio. That means you’re taking on more risk than you originally intended.
To get back to your 60/30/10 target, you would sell some stocks and possibly buy more bonds or cash investments. This helps bring your portfolio back in line with your goals.
Markets go up and down. That’s normal — but it also means your portfolio can shift without your even touching it. If you don’t rebalance regularly, you might be taking on too much (o too little) risk.
Rebalancing offers several benefits. It helps keep your investment plan on track and manages your exposure to risk. It also encourages disciplined decision-making, rather than chasing trends.
It might feel strange to sell investments that have been doing well and buy ones that haven’t. But this strategy can help you “buy low and sell high,” which is one of the key ideas behind successful investing.
You may be wondering how often you should rebalance your portfolio. There really is no one-size-fits-all answer. Some people rebalance once a year. Others do it more frequently based on how far their investments drift from their target percentages.
