How Often Should You Rebalance Your Portfolio?
Stay on track by periodically revisiting the investment mix you put in place when you created your portfolio—and restore balance when necessary.
A portfolio’s allocation to stocks and bonds doesn’t stay static. Performance differences will eventually change the proportions of your mix.
By reviewing your portfolio on a regular basis, you can determine how and when to rebalance, or get your portfolio back to its original allocation.
Consider your investment time frame, goals and risk tolerance whenever you rebalance, as your needs could change over time.
Determining how often to rebalance your portfolio may seem tricky because there’s no standard formula that works for every investor and every portfolio. In many ways, your investment portfolio is like baking bread: It’s sometimes necessary to tweak the recipe depending on the environment you’re in.
For instance, dough can rise too much too fast in some climates, which weakens its structure, eventually causing the loaf to collapse. Similarly, letting your winners run too long can lead to a lopsided portfolio. This increases the risk that your fortunes rise and fall based on the performance of one type of investment. However, just like with bread, too much meddling might wreak havoc on the outcome.
Your investment mix should be carefully allocated based on your age, risk tolerance and goals for the future. Stay on track by periodically revisiting the original recipe you put in place when creating your investment plan. And restore balance when necessary.
Read on for insights into why, when and how often you should rebalance a portfolio and the steps to consider to balance it wisely.
Why Should You Rebalance Your Portfolio?
Just as there are recommended portion sizes for a well-balanced diet, you can set the long-term mix of your portfolio to fit your needs and appetite for risk.
Most diversified portfolios include a mix of stocks and bonds, which usually don’t react the same way to market events—when one isn’t doing well, the other typically is in favor. As a result, if left unchecked, your asset allocation can change over time and actually expose you to more risk than you’re comfortable with.
Here’s a Rebalancing Example
Let’s say you intended to be a moderate investor in 2009, and you hypothetically set up a traditional 60% stock, 40% bond portfolio. You then left it alone. Over the next 15 years, stocks outperform bonds, increasing in value and proportion in your portfolio—and the portfolio shifts to 85% stock and 15% bond.
That’s way off-balance from your original allocation. In that case, your unbalanced portfolio has taken on significantly more risk while you’re getting closer to retirement and likely even less interested in a riskier portfolio.
Rebalance Your Mix
Rebalancing in Action
- Original allocation: In this example, you decided to allocate 60% of your portfolio to stocks and 40% to bonds.
- Out of balance: If market activity causes the value of your stocks to increase, you'll have a greater percentage invested in stocks, leaving you exposed to more risk than you intended.
- Rebalanced: Rebalancing—buying more bonds and selling stocks—gets you back to your original 60/40 mix.
Keep in mind that this doesn’t mean you made a mistake to begin with. A portfolio falling out of whack is natural as the market fluctuates over time.
How Often Should You Rebalance Your Portfolio?
The ingredients in your portfolio can influence how often you need to rebalance. For example, if you chose a high percentage of cash or money markets, the value of those investments tends not to swing as much as some stocks or bonds and you may not need to rebalance as often.
It’s a good idea to review your portfolio periodically. A deep dive may reveal that it's time to make changes based on your personal risk level and shifts in the market as well as your individual goals.
Will a portfolio perform better if you balance it more often? Not necessarily. Investing is usually a long-term approach to achieving your goals, so keep a long-term perspective of your portfolio too. Switching up a portfolio too often may derail it from what you want it to accomplish.
In general, a retirement portfolio when you’re still in your prime working years doesn't need to be checked every day. It's all about the long game, not the day-to-day moves. Too many check-ins may waste an investor's time, money and energy. Additionally, behavioral biases can pop up and hold back your progress.
How Should You Rebalance Your Portfolio?
How you rebalance a portfolio is not baked in. There are several types of rebalancing, and the one you should use depends on your goals and time horizon for investing. Ultimately, you want to ensure that a portfolio's asset allocation continues to match your intentions.
For example, perhaps you have education savings accounts you started when your children were born and now they are entering high school. You may want a more conservative allocation because you are closer to withdrawing funds.
After you’ve refocused on your goal for rebalancing, you’ll want to gather your quarterly investment account statements or log in to your accounts online. Review all your accounts and holdings to see how they’ve changed since your last review.
Next, you’ll need to think through your current life situation and whether your time horizon or goals have changed. Think carefully through the following questions:
Timing. Has the timing you’ve planned for your portfolio changed? Are you on track to retire sooner or later than you anticipated? Do you plan on using non-retirement investments in the near future?
Risk tolerance. How much risk are you comfortable with? Has that changed in the past year?
Working through these questions can help you rebalance your portfolio. It may also help inform the investment strategy you use going forward.
After you’ve carefully considered your answers to these questions, determine what the right asset allocation is for your current goals and timing. The right mix of investments will depend on your specific goals and life stage.
Now take a look at how your portfolio performed. For example, if the stock market has performed well since your last review, you may have a higher allocation in stocks than you intended. In that case, you might decide to sell some of your stocks to get back to your original plan. On the other hand, if your stock allocation has dropped below the amount you intended, you’ll want to think about buying some stocks.
Remember, rebalancing is more than just a look at the numbers. It’s an opportunity for you to revisit everything—from your overall financial situation and your view of the economy as well as how the markets have been performing.
Do You Need Help Rebalancing Your Portfolio?
Rebalancing on your own may be a challenge. You may even overlook market trends or personal insights that could benefit your investing future. That’s why working with a financial professional may come in handy.
It’s a financial professional’s job to focus on your investments, what’s happening in the markets and what trends may be occurring. A professional has the time and training to consider what may be suitable for each situation, day in and day out.
Just as a baker checks a recipe every so often to make sure it’s perfectly spiced and blended, an occasional rebalancing may help your portfolio align more closely with your future financial goals.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Diversification does not assure a profit nor does it protect against loss of principal.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.