Why rebalancing your portfolio regularly is important

Create a plan to routinely rebalance the assets in your investment portfolio and learn why this exercise is critical to your financial health.

Managing risk in your investment portfolio is key to building wealth. And one way to do that is through regular rebalancing, a financial exercise that involves reviewing and readjusting your portfolio’s asset allocation so it’s appropriate for your risk tolerance and financial goals.

While the act of reconfiguring the assets in your portfolio may sound technical, we are here to help you regularly rebalance your portfolio and guide you through the process.

Here’s why portfolio rebalancing is so important and how it can help you reach your long-term financial goals.

What is portfolio rebalancing?

In simple terms, portfolio rebalancing is the exercise of bringing your investments into alignment with the vision you have for your long-term investment strategy. It ensures that your portfolio’s asset allocation appropriately reflects your current risk tolerance and financial goals.

Why should you rebalance your portfolio?

Portfolio rebalancing is necessary because, over time, each asset class behaves distinctly. Stocks may hit record highs, for example, or the value of your bonds may plateau. As such, if your portfolio is left unattended, it may evolve into a different risk profile than you planned for. As a result, you might find your portfolio is riskier than you are comfortable with, or you could find it lacking the return potential necessary to meet your financial goals.

How does rebalancing work?

Rebalancing acts as a counterbalance to the movement in the markets and can bring your portfolio back in line with your investment strategy. For example:

When stocks are falling in value, your portfolio could become overweight in other assets, such as cash. This could change the overall risk profile of your portfolio. Rebalancing could mean moving money out of less risky assets, like cash, and adding to your portfolio’s stock exposure, which may boost performance when markets change.
When stocks are rising in value, your portfolio could start to carry more equity assets, increasing overall risk. Rebalancing could mean taking profits (selling some of your stock investments to reap gains along the way) and redeploying those dollars into positions that are perceived to be less risky, like bonds or cash.

While many investors’ instincts are to sideline assets when markets are rough — or become more aggressive when markets are good — portfolio rebalancing helps manage emotions spurred by market swings. It also helps avoid impulsive decisions that can derail progress toward your goals. And while timing the market is not possible, rebalancing can help investors buy when asset prices are lower, as well as sell when asset prices are higher.

How often should you rebalance your portfolio?

There are no specific rules around how often to rebalance. However, it’s key that you’re reviewing your risk tolerance on an ongoing basis and that your portfolio stays invested in an allocation you are comfortable with and meets your needs.

Here are some common rebalancing approaches to consider:

Some investors rebalance on a predetermined schedule, such as annually or quarterly.
Others choose to rebalance when asset weightings exceed a threshold, such as +/- 10% from their strategic target.
Others combine the first two approaches, checking their account on a schedule and only making changes if they exceed a threshold.

Advice spotlight

Schedule an annual review with my team to determine whether rebalancing is needed. During this regular touchpoint, we can help you reflect on your risk tolerance and financial goals, and determine whether any tactical adjustments to your portfolio are advisable in light of any recent life changes.

How rebalancing can help during market volatility

When markets become turbulent, it’s not uncommon for investors to question the long-term investment strategy they developed with their financial advisor when times were less volatile.

Though a natural inclination may be to lean away, periods of market volatility are an especially important time for investors to lean into the long-term plan that was built to weather these storms.

Building wealth requires focusing on investment objectives over time and avoiding timing mistakes that could throw your portfolio off track. Regardless of your risk tolerance, maintaining the discipline of portfolio rebalancing can help you stay focused on your objectives.

Could your portfolio benefit from rebalancing?

My team can regularly evaluate your investment portfolio and develop a personalized rebalancing approach to keep your asset allocation in line with your financial goals. We will also consider other factors, like whether your portfolio resides in a taxable or tax-sheltered account, as rebalancing could result in a taxable event.