The initial asset allocation of your investment portfolio is crucial for long-term financial success. However, investments are not something that can be left unmaintained for years. Occasionally, the market will change, or your risk level will fluctuate. To make sure your target asset allocation stays consistent, you need to rebalance your investment portfolio. As an investor, this means that your current portfolio is no longer meeting your goal and therefore, something needs to change. To help, here's how to rebalance your portfolio to realign with your assets' target allocation.
Understanding Portfolio Rebalancing
When you begin to create a portfolio, you need to first consider your investment goals. In order to meet these goals, you'll want a targeted asset mix that fits within your risk tolerance level. This is done through an asset allocation strategy—a strategy that helps you determine how much money will go towards stocks, bonds, mutual funds, equity markets, and varying asset classes. Once you determine your original investment portfolio, you'll have a ratio of asset allocation that adheres to your risk tolerance level. Over time, as the stock market changes or companies gain or lose equity, these allocations can shift. While minor shifts are normal and expected, sometimes investments can considerably change your portfolio value and asset allocation. If these don't correct themselves, you may need to look at rebalancing a portfolio to ensure that you're staying in line with your goals.
Rebalancing Your Portfolio
Rebalancing your portfolio requires a few simple steps and a basic understanding of your asset classes. You'll need to review your ideal asset allocation, determine your current asset classes, and buy and sell stocks, bonds, and shares to rebalance your portfolio.
Review Ideal Asset Allocation
The first thing to do is make sure that you take the time to review your ideal asset allocation. How did you originally breakdown your investment portfolio? Depending on your risk tolerance, you either created a conservative, moderate, or aggressive investment strategy. Remember, this breakdown is a personal decision that's created to best meet your needs, so adhering to them over time is essential in reaching your goals. If you haven't yet created this balance, talk to a professional about how to purchase the correct ratio of stocks, bonds, and cash investments for your short and long-term goals.
Determine Current Asset Classes
Once you recall your original investment portfolio—the correct mixture of cash, stocks, and bonds—you'll need to compare them to your current asset classes. With the increase in technology and two-factor authentication online, more investment accounts are now available for investors to access at home. Go to your online dashboard and review your investment overviews. These dashboards will differ depending on the company you work with, but they should show you your target asset allocation vs. your current asset allocation. This is best used when all of your products are in one place. Otherwise, you may need to do more work to better understand how your entire portfolio is doing. If your current allocations aren't in line with your target allocations, you'll need to make some changes.
Buy and Sell Stocks, Bonds, and Shares to Rebalance Your Portfolio
If you notice unbalanced assets, you'll need to buy and sell the stocks, bonds, and shares in order to rebalance your portfolio. This is the part of the process that can be problematic for untrained individuals. It's not as simple as it might seem. You need to choose which investments to sell in order to reduce one asset and then reallocate those funds to another asset to assure the correct proportional investments. If you have more straightforward investments, this is easier. However, as many investment portfolios tend to get more complicated as they age, you may be better off allowing for professional—or automated—adjustments. Remember, when rebalancing a portfolio, make sure that you buy and sell so that you're back to your original balance. There are many different types of investors, but the best way to ensure that you stay calm throughout the process is to find something that works for you. For example, if you tend to get nervous or even panic during sharp stock market fluctuations, you will likely be better off investing in conservative accounts. If you're not sure how to achieve the right balance of investment accounts in the most effective way, consider getting professional investment advice from a financial advisor.
How Often Should You Rebalance Your Portfolio?
Many investors don't need to rebalance their portfolios more than once per year. However, rebalancing fluctuates depending on the type of investment accounts. Retirement accounts, for example, should be rebalanced before the end of the year to make sure that you take advantage of tax credits. To keep things in line with your goals, later on, you may need to rebalance again after the end of the year. Another good time to rebalance your portfolio is after any large market movements. This doesn't include short-term fluctuations, but rather market changes that are either +/- 5%. While these changes can correct themselves over time, proactive investors may find better results by rebalancing a portfolio regularly. Again, rebalancing a portfolio can be a complicated endeavor. If you have any doubts, work with a professional to help make the process more manageable.
How Important is it to Rebalance Your Portfolio?
Individual asset allocation is an important step in maintaining investment goals. Without the proper balance, your investments will no longer be aligned with your risk tolerance level, time frame for return, and overall financial goals. Creating a rebalancing plan is therefore just as important as creating your original investment strategy. While it is possible to do this on your own, rebalancing a portfolio often requires finesse and experience. To make sure you're getting the most out of your investments, regardless of market conditions, consider working with a financial advisor today. Contact William Bevins today at [email protected] or by calling (615) 469-7348.