When it comes time to reassess the target allocation of your investment portfolio, you might be wondering where to even start. Follow these basic tips to guide you through the process.
1. What Does “Rebalancing” Mean?
Based on your tolerance for risk, your portfolio might be imbalanced.
- If you have a low-risk tolerance and high-risk investments grow to take up a large portion of your portfolio, then you might want to consider selling those assets and purchasing safer ones so that your portfolio is “balanced” again.
Rebalancing refers to the act of adjusting your investments to reflect your risk tolerance.
2. When Should You Rebalance?
- Some say at once a year, however, there is no set rule.
- When asset allocation performance strays by a certain percentage point.
- A combination of both
3. Take Stock of the Big Picture
- Don’t just look at one retirement account or one brokerage account separately. Take a step back and evaluate all of your assets together, given which accounts they are in as well.
- What fees are you paying? What assets do you own? How have they performed? What level of risk do they have based on past performance, volatility, and analyst consensus?
4. What’s Changed Since You Last Checked?
- Check up on the market landscape and the financial products available to you. You could take advantage of lower fees, more advantageous investment options, or a different new discovery that could improve your financial picture.
5. What Exactly Should You Rebalance?
- Sell assets whose fees are too high or whose business you don’t understand. If you don’t understand the business, you won’t know what news or changes may affect the stock.
- You may also sell stocks that unperformed their benchmark, however, past performance does not indicate future results.
- Buy assets whose fees are lower and whose business you understand.
- Since there is no telling the future, it’s impossible to ensure that what you buy performs as you expect it to, but that doesn’t mean you can’t make a calculated risk in investing in something you understand, have done the research on, and are confident in.
6. Different Methods of Rebalancing
Goal/Age Based
- Based on how close you are to your financial goal or retirement; you can adjust your portfolio holdings to shift from asset growth to asset protection.
Rebalance On Your Own
- Develop your own criteria and execution plan.
- Although you may not be spending money on actively managed funds or advisors, you will be spending your time keeping up with financial regulations and market changes.
- Remember, there are people who have trained for years to do what you are attempting to do and who work full time jobs doing it. Unless you’re okay with making costly mistakes, you may want to consider not managing your portfolio rebalancing all on your own.
Automatic Portfolio Rebalancing
- Another option is to utilize a robo-advisor or automate your rebalancing by investing in certain funds that do that.
- However, this plan won’t rebalance based on your unique financial situation and goals
Investment Advisor-Assisted Rebalancing
- An investment advisor can steer your portfolio rebalancing process with the knowledge and expertise they gather from staying tuned to market and financial landscape developments.
- Although they may be much more in-tune with your financial situation and goals, they may also cost you more than a simpler solution.
Source: https://www.investopedia.com/investing/how-renew-and-adjust-your-portfolio/