The Biggest Mistakes First Time Investors Make

7 Tips on Rebalancing an Investment Portfolio

09 01 2017

7 Tips on Rebalancing an Investment Portfolio

Asset allocation is all about balancing the risk and the reward. Each asset class has a different level of risk and return, so some perform better or can be more volatile than others – therefore, each will behave differently in the market over time. Without care, this can skew your portfolio toward too much risk. Asset allocation aims to balance that risk by breaking up a portfolio’s assets per an individual’s goals, risk tolerance, and investment outlook.

Broadly, financial advisors recommend a diverse investment portfolio to mitigate market volatility, but there are always commonly asked questions: What should you do if the market takes a sudden dip? What about when the market is at an all-time high?

Tips on Rebalancing an Investment Portfolio

It can be tough to navigate the unpredictability of the market and understand the benefits of diversifying your portfolio. Here are 7 popular tips from financial advisors, the SEC, and other experts for balancing a portfolio. Consider this a primer to rebalancing, not a full guide – check with your financial advisor to see which (if any) might apply to your financial situation and goals.

1. Create a list of all investments

Being able to look at all of one’s assets together can help with asset allocation. One popular method is to create a chart that includes a 401(k), IRA, or other types of workplace retirement accounts, any stocks (including mutual funds and ETFs), and bonds. The chart can be completed by including the total value of all those assets, as well. This chart can help an individual keep track of all their investments by having them in one place. Never underestimate the power of organization when it comes to financial products.

2. Calculate current asset allocation

Once all assets are listed in one place, it’s time to allocate them. This is an easy step: Simply group asset classes together (stocks in one category, bonds in another, real estate investment opportunities, etc.). While these accounts can be as detailed as you desire, simple is often best – assets only need to be broken down by class. To calculate the asset allocation, simply divide the amount in each class by the total portfolio.

3. Determine a target asset allocation

There are a variety of factors that go into your preferred asset allocation, including age, risk preference, and experience. For example, newer investors who may feel panicked during market downs might find it worthwhile to choose a more conservative asset allocation and pursue safer opportunities. Of course, it’s always wise to discuss goals and specific allocations with a financial advisor during the financial planning process. Ultimately, these are your decisions and require your own due diligence – but make use of a team of knowledgeable professionals. You’re not in this alone.

4. Establish a timeframe to rebalance

Many new savers ask, “How often should I rebalance my portfolio?” For most young investors, rebalancing a portfolio once a year may be enough. However, more experienced investors often choose to rebalance semi-annually. Regardless of experience, it’s good to take note of large jumps in the market – should it go up or down by even a few percent, an allocation might fall out of balance. Even if you don’t rebalance your portfolio during these regular intervals, it establishes a good habit of checking in (periodically) on your assets.

5. Incorporate new money

A big part of saving is making regular contributions. If you’ve recently received a bonus or have a decent amount of cash to spare, you can always invest it and allow it to grow. You can also use these funds to beef up a portion of your assets that may be below the target allocation. It usually only takes a few months for the underweight funds to catch back up after directing more of the new money that way.

6. Consider autopilot

Some employee-sponsored contribution retirement plans offer auto-rebalancing feature, which allows one to select a time interval at which their account will be rebalanced back to the allocation they selected. This automation can save some stress, take the emotion and potential hesitation out of the process, and is worth consideration if available. This should never replace regular check-ins on the portfolio with your financial advisor, though – as goals and the market develop, your portfolio and the investment opportunities you pursue should as well.

7. Don’t chase trends

It can be tempting to put more money into a stock or fund that is doing well or sell when another is doing poorly, but chasing trends isn’t a reliable strategy. Talk to a financial advisor if you are worried about market volatility, and don’t make decisions based on emotion or what can be found in one article online. Take the time to research your financial decisions and make a smart choice after it’s been thought over.

Rebalance and Reap the Rewards

Rebalancing can be a valuable part of long-term saving, and there are many online resources from organizations such as the SEC available as a primer. However, each financial journey is ultimately a personal experience – you may discover after discussing with your financial planner that these popularly recommended tips don’t fit your situation at all. That’s okay!

Your financial team can help you find your way. The right mix of stocks, bonds, cash, real estate investments, or other financial products can help you reach your goals in a way that fits you – and that’s what’s most important.



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