You’ve probably heard about the benefits of rebalancing your investment portfolio: it keeps your asset allocation consistent with your risk profile, it has the potential to boost your returns, and it enforces good investing habits (buying low and selling high). Still, it’s a chore, and one that can fall by the wayside at a time of year when you’d rather be preparing for warm weather activities. If you’re worried that portfolio rebalancing season has passed you by, worry no longer. While January and February are the most popular months for investors to re-assess their financial situations and make adjustments to their portfolios, there’s nothing magical about the turn of the year when it comes to rebalancing. In fact, those who focus exclusively on “when” to rebalance are missing the primary point of rebalancing: to maintain a risk-appropriate asset allocation.
Over time, market movements can seriously alter your investment mix. If equities go on a hot streak, your portfolio could quickly reach a level of volatility that’s too high given your age, income, or risk tolerance. Likewise, if bonds outperform equities for an extended period, and you fail to react, you could lose an opportunity to boost your expected return without exceeding your capacity for risk. It’s important to establish rebalancing habits that systematically minimize your exposure to these situations.
The success of your rebalancing plan will largely be determined by your ability to stick with it. So, if rebalancing during a specific month works for you, there’s no reason to change things up. But if you’d like to establish good rebalancing habits for the first time, or if you enjoy checking your portfolio more often than annually, consider setting up rebalancing bands. By using bands instead of a set time interval, you can check for the need to rebalance whenever you look at your portfolio, not just one arbitrary time each year. For instance, if you had a simple portfolio of 50% stocks and 50% bonds, you could set up bands that dictated rebalancing whenever either investment reached 55% of your portfolio (+/- 10% of the percentage in question, a good thumb rule). If drastic market movements made you suspicious that your asset allocation was no longer appropriate, you would simply check your portfolio to see if your assets were in band, and if not, make the necessary trade(s) to bring your assets back into their prescribed ranges.
Of course, your portfolio is probably much more complex than the two-asset example above, which can make rebalancing a daunting task. I created a free Excel-based Rebalancing Tool to help make things easier for you. Just click on the link, save the file to your computer, and customize it to meet your needs. Be sure to enable macros for full functionality. If you make regular contributions to or withdrawals from your portfolio, the tool can also help you “rebalance-as-you-go” by determining which funds to buy or sell in order to maintain your target allocation. For more information about rebalancing, including detailed answers to questions like, “Why is it necessary to rebalance?” and “How do I rebalance my portfolio?” visit our Rebalancing tab.
Reminder: Need an opinion on a risk-appropriate asset allocation? Get a FREE portfolio recommendation today!
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