Weekly Update – 3/5/2025
Market fluctuations, economic shifts, and personal financial changes can all impact an investment portfolio over time. What once aligned with financial goals and risk tolerance may have drifted due to market movements. Rebalancing is a chance to check your asset mix. It involves adjusting the allocation of assets to maintain an intended level of risk and diversification. Check your asset mix periodically to help in keeping investments aligned with long-term objectives.
Understanding Portfolio Re-balancing: Check Your Asset Mix
Re-balancing is the process of realigning a portfolio’s asset allocation by buying or selling investments. It helps bring the portfolio back to its original or target allocation. Over time, different asset classes grow at varying rates, which can shift the overall balance. For example, if stocks have outperformed bonds, a portfolio may become more stock-heavy than initially planned, exposing it to higher risk levels than intended.
Re-balancing involves selling assets that have grown beyond their target proportion and reinvesting in areas that have lagged. This practice helps maintain the risk-return balance originally designed for the portfolio.
Why Now Might Be a Good Time to Re-balance
Several factors may make it timely to check your asset mix:
- Market Shifts Have Altered Portfolio Allocation – Recent market fluctuations may have caused a portfolio to drift from its intended allocation. A strong performance in certain sectors or asset classes can lead to an overweight position, increasing exposure to market volatility. Re-balancing helps restore the original asset mix.
- Changes in Financial Goals or Risk Tolerance – Personal financial situations evolve over time. Career changes, approaching retirement, or shifts in financial priorities may call for a different investment approach. A portfolio that once aligned with a higher risk tolerance may now need adjustments to reduce exposure to volatile assets.
- Interest Rate and Economic Changes – Interest rate movements and economic conditions can affect different asset classes in various ways. Bonds, equities, and alternative investments may respond differently to policy shifts. Reviewing allocations in light of economic changes can help maintain an approach suited to current conditions.
- Tax-Efficient Strategies – Re-balancing can also be part of a tax-conscious investment approach. Selling certain assets may result in taxable gains, but strategic re-balancing—such as tax-loss harvesting or adjusting investments in tax-advantaged accounts—can help manage tax implications.
- Maintaining Diversification – A well-diversified portfolio spreads investments across asset classes to balance risk. Over time, some investments may become over represented, reducing overall diversification. Re-balancing helps maintain a mix that aligns with long-term strategies.
How to Approach Re-balancing
When it’s time to re-balance your portfolio, there are several strategies to help you check your asset mix:
- Review Asset Allocation – Compare current asset allocations to the original targets. If certain assets have grown disproportionately, determine whether adjustments are needed.
- Set a Re-balancing Schedule – Rather than reacting to short-term market movements, setting a periodic review—such as quarterly, semi-annually, or annually—can help keep a portfolio on track. Some investors also choose to re-balance when allocations shift beyond a specific percentage threshold.
- Consider Costs and Taxes – Re-balancing may involve transaction costs and tax implications. Reviewing strategies like tax-efficient fund placement, tax-loss harvesting, and making adjustments within tax-advantaged accounts can help reduce potential costs.
- Use Dividends and New Contributions – Instead of selling assets, another way to re-balance is by directing dividends, interest, and new contributions toward under weighted asset classes. This gradual approach can help maintain the intended allocation without incurring unnecessary transaction fees.
- Evaluate Investment Choices – Re-balancing presents an opportunity to reassess investments. Some holdings may no longer align with financial goals or market conditions, making it a good time to review whether adjustments are needed.
Make Sure Your Portfolio is Working for You
Re-balancing plays an important role in maintaining a portfolio that aligns with financial objectives and risk tolerance. Market changes, personal financial shifts, and evolving economic conditions can all affect an asset mix over time. Periodic reviews and adjustments can help maintain an investment approach that reflects long-term goals. By considering allocation shifts, tax implications, and diversification, investors can keep their portfolios structured in a way that aligns with their financial strategies.
If you think you or a family member would benefit from retirement planning guidance, contact our office by calling 865-470-8584 or 423-239-6420 to schedule a no-obligation discovery call.