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It’s Almost 2015: Have You Rebalanced Your Portfolio Yet?

Portfolio Planning
Written by Cher Zavala

One of the biggest mistakes that investors often make is treating their portfolios as a “set it and forget it” proposition.

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One of the biggest mistakes that investors often make is treating their portfolios as a “set it and forget it” proposition.


That might work when you’re cooking a pot roast in the slow cooker, but when you want to make the most of your investments and see the highest possible returns, you need to do a little bit of work periodically to make sure everything is as it should be.

Financial advisors suggest that investors periodically rebalance their portfolios to ensure that they have the right mix of assets and aren’t too heavily weighted in one area or another. While opinions vary on how often you should rebalance, in general, most experts suggest that you review your portfolio and make changes at least once a year, with quarterly reviews the most common recommendation.

But what exactly does it mean to rebalance your investment portfolio?

The Basics of Portfolio Rebalancing

When you first open an investment account, you were probably advised to allocate your money among several different asset types, as it’s never a good idea to put all of your eggs in one basket, so to speak. So you might have put 50 percent of your money in stock, 25 percent in bonds, and 25 percent in treasuries. The idea is to balance the risk, so that major losses in any one category aren’t devastating to your overall portfolio.
However, by its very nature, the market isn’t static. The whole idea of investing is to put your money to work for you. And when it works, it’s great — except that earnings or losses in any category can change the balance of your allocations, and change the overall risk factors of your portfolio.

Let’s look at a specific example. An investor has $100,000 to invest, so she puts $50,000 in stocks and $50,000 in bonds. She examines trending stocks through a site like Trends Investing before setting her portfolio, and the value of her stocks rises to $75,000 over six months, while the bonds hold steady and see only a modest $5,000 gain. However, now her portfolio is about 57 percent stocks, and 43 percent bonds. This isn’t a huge shift, but over time if her stocks continue to outperform the bonds, the disparity will continue to expand, thereby creating more risk.

This is why it is important to rebalance your portfolio to return to your original allocation. There are several ways to do that. First, some investors choose to sell off some of the assets in the more heavily weighted categories. However, this does come with some tax implications that could offset the gains, so it’s not usually the first choice. Many people opt instead to move some of the money from the larger segments into the lower performing asset classes, or simply stop contributing to the heavily weighted areas in order to allow the other segments to “catch up.”

Maintaining Your Portfolio BalanceMaintaining Your Balance

While quarterly rebalancing is important for regulating risk, it’s also important to rebalance to ensure that you are maximizing your investments over time. This is especially true for younger people who open retirement accounts. Most young people are advised to be more aggressive with their investments in their 20s and 30s, as they have more time to recoup losses.

However, there are factors other than age that can influence your portfolio’s performance. For example, as you earn more, you are probably investing more, and maintaining the same aggressive mix when you are contributing more money could be disastrous. Periodic rebalancing ensures that your allocations are always in line with your contributions, goals, and risk tolerance.

It’s also important to note that it is possible to rebalance too often. Some people spend a great deal of time focusing on their portfolio, rebalancing their allocations as often as monthly. Studies show that rebalancing too often doesn’t have any measurable benefit for your portfolio’s overall value, and in fact can actually be detrimental, depending on the fees associated with making too many changes and trades. If you rebalance too seldom — as in less than once a year — you could lose any potential gains, and even lose more money than you would have otherwise because you have too much invested in one particular area.

Successfully managing an investment portfolio does not have to be time consuming or difficult. If you have questions, work with a qualified financial advisor and get help ensuring that your portfolio has the right balance and isn’t working against you.

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What have you accepted within your life, physically and/or mentally? What are you still working on accepting?

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About the author

Cher Zavala

Cher is a content coordinator who assists in contributing quality articles on various topics. In her free time she also enjoys hiking, traveling and getting to know the world around her. Cher has built up many strong relationships over the years within the blogging community and loves sharing her useful tips with others.

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