Buzz
Following recent market shifts, many investors are questioning whether it’s time to rebalance their portfolios. Some believe it should align with your long-term strategy and recommend doing it once a year. Others argue that rebalancing should happen whenever the market fluctuates by five percent or more.
If you’re invested in target-date funds, or if a robo-advisor or financial advisor manages your portfolio, you likely don’t need to worry about rebalancing too much. One article advocates for quarterly rebalancing, while a report from Vanguard shows that the outcomes don’t differ significantly, regardless of how often you rebalance (although taxes and fees could be affected). According to Merrill Lynch, one scenario where rebalancing is essential is when:
the stock market is performing well, and the value of your stocks rises. As a result, stocks will represent a larger portion of your portfolio, potentially increasing your exposure to risk beyond your intended level.
Rebalancing your portfolio revolves around managing your asset allocation—the mix of stocks, bonds, and other investment types in your portfolio. As we’ve discussed here, when you’re younger, it's common advice to allocate most of your assets into equities. As you age, you can gradually shift toward more conservative options, though you're not obligated to do so if you're feeling optimistic about the market's potential.
You don’t have to stick to traditional rules if they don’t feel right for you. After all, it’s your money. This is an excellent time to reassess your risk tolerance. If recent market fluctuations left you uneasy, or if retirement is on the horizon, you might decide it’s time to move some of your funds into more secure investments. On the other hand, you could choose to invest more in stocks while prices are lower. Take this quiz from Vanguard to gauge your risk tolerance. Tools like Personal Capital and FutureAdvisor offer free portfolio analysis.
Once you've reassessed, review your portfolio’s current allocation (you can usually do this online) to determine if it aligns with your revised risk tolerance or if market fluctuations have thrown it off course. Then, buy and sell investments to rebalance your portfolio. This typically means ‘selling just enough of your top performers and shifting the proceeds into underperformers to bring your portfolio back to its intended allocation or adjust it to suit your current situation,’ as Penny Wang writes for Consumer Reports. It might seem counterintuitive, but that’s the strategy.
You can take care of this now, on your birthday, or during your next personal inventory day. The key is understanding what feels comfortable for you and being aware of where your money is going.
