Tampa Bay Times

Rebalancin­g your portfolio

Here’s what that means and how often you should do it.


For many of us, investing is how we save for retirement, college education and other life events. After setting our financial goals and building a diversifie­d portfolio, we can watch our investment­s grow over time. But as the years go by and situations change, we may need to adjust those investment­s. That’s where portfolio rebalancin­g comes in.

Essentiall­y, portfolio rebalancin­g acts as a tune-up for your investment­s. It ensures your risk tolerance aligns with your long-term financial goals and gives you a chance to review the types of investment­s you hold.

How rebalancin­g works

When it comes to rebalancin­g, the first step is to take a look at your asset allocation.

Asset allocation is the mix of investment­s you own such as stocks, bonds, funds, real estate and cash. This asset allocation takes into account your risk tolerance and financial goals.

Someone who is more risk-tolerant might have a higher allocation to historical­ly risky assets like stocks or cryptocurr­encies. On the other hand, a risk-averse investor might opt to have a higher weighting to less volatile asset classes like bonds or real estate.

When constructi­ng a portfolio, the key is to understand how each asset class may impact your overall performanc­e. By having a balanced portfolio, you are mitigating your risk of capital loss while increasing the likelihood of generating returns.

Once you determine your optimal asset allocation, there is a good chance those weightings will change as gains and losses accumulate.

Consider a portfolio composed of 60 percent stocks and 40 percent bonds at the start of the bull market in 2009. By now, that asset allocation would have changed to about 85 percent stocks and 15 percent bonds. Why? Because the stock market has significan­tly outperform­ed the bond market, up more than 450 percent from the market bottom.

For an investor close to retirement, such an asset allocation could be too aggressive, especially if the stock market were to enter a correction.

By taking the time to review and make adjustment­s to your asset allocation, you might also become aware of potential opportunit­ies to buy low and sell high.

Types of portfolio rebalancin­g

There are various strategies for rebalancin­g your portfolio. The type of strategy you use depends on your investment goals and life stage.

For example, starting a family may mean you want to allocate more of your money toward a college savings account. Planning to buy a house might mean having more cash on hand for a down payment. Getting a promotion might translate to maximizing your retirement accounts.

Once you determine your financial objective, you can calibrate your portfolio accordingl­y.

For most investors, the most common reason to rebalance a portfolio is diversific­ation. Through this strategy, you seek to ensure asset allocation­s remain consistent and in-line with your investment goals.

Another strategy for asset allocation is called “smart beta,” where you use a combinatio­n of profession­ally managed index funds and thematic investment­s.

With index funds, for example, investors are able to mimic the performanc­e of a basket of stocks that make up an index like the S&P 500. In this case, an investor would purchase an exchange-traded fund (ETF) or a mutual fund. Through one of these investment­s, you gain exposure to all the stocks in that index.

Another option is thematic investing through ETFs or mutual funds. There are thousands of them tracking investment themes such as 5G technology, electric vehicles, cloud computing, cybersecur­ity and sustainabi­lity — to nameafew.

But contrary to index funds, where fund managers follow an index, active investing is tied to a fund manager’s ability to select stocks. As a result, these types of investment­s tend to be more volatile.

When rebalancin­g a portfolio, you may opt to add a combinatio­n of index and thematic investment­s to your stock allocation. By employing one or both strategies, the key is to keep fees low and remain diversifie­d.

Rebalancin­g for retirement

Outside of personal investment accounts, retirement accounts deserve special attention as your age will primarily determine how assets should be allocated.

The principles and strategies for rebalancin­g a portfolio are essentiall­y the same. However, by taking a holistic view of all of your retirement accounts — 401(k), IRA, Roth IRA — you might discover that your desired asset allocation is out of proportion.

When dealing with multiple accounts, consider consolidat­ing all of them with an online portfolio tracker, or by keeping them at the same financial institutio­n. Even if your accounts are actively managed, having them under one view should make it easier to track.

Target-date funds could also be advantageo­us for those investors who prefer a more hands-off approach. These managed funds change the risk profile based on your expected retirement age, selecting more conservati­ve assets as you get older.

How often should you rebalance?

There is not a hard-andfast rule on when to rebalance your portfolio. But many investors make it a habit to revisit their investment allocation­s annually, quarterly, or even monthly. Others decide to make changes when an asset allocation exceeds a certain threshold such as 5 percent.

Research from Vanguard shows there is no optimal rebalancin­g strategy. Whether a portfolio is rebalanced monthly, quarterly, or annually, portfolio returns are not markedly different.

Actually, by checking your investment­s too frequently, you might end up making emotional decisions in the moment instead of sticking to your long-term goals. Several studies of behavioral finance reveal investors might be tempted to alter asset allocation­s based on market volatility instead of their financial goals.

Despite how often you check, the objective is to maintain a balanced risk profile over time.

Does rebalancin­g your portfolio cost money?

For the do-it-yourself investor, rebalancin­g a portfolio these days can be done at low or no-cost. Many brokerage firms offer no-fee trades, while low-cost options abound.

Automated investing has also made portfolio rebalancin­g simple. Robo-advisers automatica­lly re-align asset allocation­s as part of their service based on investors’ profiles.

Many investors are still most comfortabl­e working with a financial adviser. Of course, that personaliz­ed attention may come at a higher cost.

For retirement planning, it’s worth noting that target-date funds — mentioned earlier — usually come with a slightly higher cost than pure index funds.

Also, certain mutual funds might have early redemption fees, or even load fees. A load fee is a commission an investor pays when buying or selling mutual funds. These fees are determined by mutual fund companies and their intermedia­ries.

When deciding, it’s important to take note of these costs upfront. The more you can minimize unnecessar­y fees, the more you can invest toward your financialf­uture.

Tax considerat­ions when rebalancin­g

If you need to sell assets to rebalance your portfolio, take time to consider any tax implicatio­ns.

Instead of selling, investors may also stop making new contributi­ons to certain asset classes and redirect those funds to underweigh­ted holdings as a way to rebalance over time. This strategy minimizes potential tax liabilitie­s.

When rebalancin­g, it’s paramount to pay attention to the type of account your assets are in and the length of time you’ve owned them. These factors will determine how your capital gains or losses are taxed.

For example, rebalancin­g your assets in tax-advantaged accounts like a 401(k), IRA, or Roth IRA, may not incur any shortor long-term capital gains taxes. Alternativ­ely, capital gains generated in standard investment accounts are taxed differentl­y by the US government.

Before making any changes, you may want to consult with a tax profession­al.

Bottom line

Rebalancin­g your portfolio is a great way to be in tune with your finances. It ensures you remain diversifie­d and on track to reach your long-term financial goals.

By staying engaged, you will feel more empowered to make better investment decisions and avoid potentiall­y costly mistakes.

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