Equifax

Finance Blog

Rebalancing Your Portfolio

Written by Roger Wohlner on May 10, 2011 in Retirement  |   No comments

Rebalancing Your Portfolio Roger Wohlner You probably already have a financial plan in place that includes an asset-allocation strategy. (If you don’t, check out this post from Dan Solin.) This strategy helps you control your portfolio’s risk via an allocation among different asset classes. However,…

Rebalancing Your Portfolio
Roger Wohlner

You probably already have a financial plan in place that includes an asset-allocation strategy. (If you don’t, check out this post from Dan Solin.) This strategy helps you control your portfolio’s risk via an allocation among different asset classes. However, your portfolio won’t stay within that allocation by itself.

Different investments earn different rates of return, and over time your allocation will become unbalanced. Thus, you will want to review your portfolio periodically and make adjustments to rebalance it.

While rebalancing is easy enough to understand, it is often a difficult concept for investors to implement. Rebalancing goes against your basic instincts. With rebalancing, you are basically selling those investments that are performing well in favor of those that are underperforming. It might help to remember that you are following a basic investment principle when rebalancing: you are buying low (underperforming investments) and selling high (well-performing investments).

A few thoughts on rebalancing:

Rebalance at least annually. Rebalancing too frequently can be counterproductive and may result in excess costs in the form of short-term redemption fees on mutual funds or frequent trading commissions for individual stocks or ETFs. Generally, rebalancing semi-annually or annually works well. Choose a date to rebalance—perhaps at the beginning of the year, when you receive your annual statements, or at the end of a quarter. On this date, compare your current allocation to your target allocation. If your current allocation is off by more than the limits specified in your financial plan, then rebalance back to the target allocation for that asset class.

Rebalance when your allocation differs from your target allocation by a designated percentage. At the preselected rebalancing interval, review your overall portfolio by asset class. Ideally, your investment policy has a target allocation percentage and an acceptable range for each investment style. For example, your target allocation for large-cap domestic stocks might be 25 percent, with a range of 20 to 30 percent. So if the percentage allocation is between 20 and 30 percent, you do not need to rebalance.

If the allocation is right at the high or low end of the band, you may or may not want to bring it back to the target. This is where you may decide to be a bit tactical in your rebalancing based on your outlook for a particular investment style. For example, if your bond allocation is at the lower end of your target range and your personal outlook for bonds is poor, then you might want to allow this allocation to stay at the lower end of the range. Should the allocation fall below the lower end of the range, however, you will want to rebalance enough to at least bring the allocation back within the target range.

Rebalance regardless of current market conditions. Many investors abandoned their asset allocation during the 2008–9 market downturn largely based on fear. In many cases, they bailed out of equities altogether. Many did this near the bottom of the market and have never gotten back into the market. These investors suffered the cruelest of all fates: they booked large losses, and because they stayed largely or totally out of the market, their portfolios did not recover as part of the torrid market rally off the March 2009 lows. As tough as it might be to stomach losses, if you have a long-term plan that includes an investment strategy, try to stick to it and rebalance at regular intervals.

Once you’ve decided what needs to be rebalanced, you need to implement those changes. If the change is within a tax-deferred account, such as a 401(k) plan or individual retirement account, it can typically be made without tax ramifications. With taxable accounts, you’ll want to consider the tax ramifications before implementing the change.

If the sale of an asset will result in a tax liability, consider other methods to implement the change. For instance, new investment dollars can be directed to the underweighted portion of your portfolio, or periodic interest, dividends, or capital gains distributions can be redirected to the underweighted portion.

Regardless of whether periodic rebalancing might trigger some tax consequences, reviewing and rebalancing your investments is vital. Markets change, often swiftly and violently, as we saw in 2008–9. Periodic rebalancing forces you to take some of your gains off the table. Many investors are good at picking investments for purchase. Far fewer have a sell discipline.

Roger Wohlner, CFP® is a fee-only financial advisor at Asset Strategy Consultants. Roger provides advice to individual clients, retirement plan sponsors and participants, foundations, and endowments.


Follow Roger on Twitter; connect with him on LinkedIn.

Read More:

Retirement Savings Strategy: Will Your Returns Allow You to Retire on Time?
How Often Should I Update My Estate-Planning Documents?
Should You Use Retirement Savings to Pay Off Debt?

No comments yet


Leave a Comment


Name :


Commenting guidelines

We welcome your interest and participation on this forum, but be aware that comments will be published at Equifax's sole discretion. Please don't use this blog to submit questions or concerns about your Equifax credit report or raise customer service issues. Instead, you should contact Equifax directly for all such matters and any attempts to do so in this forum will be promptly re-directed.

Some other factors to consider when commenting:
  1. Registration and privacy. While no registration is required to visit our forum, participants wishing to post a message must register by creating an account. All personal information provided by forum members incident to registration is governed by our Terms of Use and Privacy Policy.
  2. All comments are anonymous. We'll delete your name, e-mail address, and any other identifying information, including details about your investments.
  3. We can't post or respond to every comment - As much as we'd like to, we can't post every comment, nor can we guarantee that we will respond to each individual message. All questions or comments about your Equifax credit report or similar customer service issues should be handled by contacting Equifax directly.
  4. Don't offer specific legal, tax or financial advice. All of the materials on this Site are for information, education, and noncommercial purposes only and this forum is not intended as a means of expressing views or ideas regarding any specific legal, tax, or investment advice. While offering general rules of thumb is both permitted and encouraged, recommending specific ideas or strategies regarding investments, taxes, and related matters is prohibited.
  5. Credit Repair. This blog is not intended as a venue for the discussion or exchange of ideas regarding credit repair or other strategies intended to assist visitors and community members improve or otherwise modify their credit histories, ratings or scores.
  6. Stay on topic. Your comment should be concise and pertain to the specific post in question.
  7. Be respectful of the community. The use of profanity, offensive language, spam, and personal attacks will not be tolerated and egregious or repeat offenders will be banned from future participation. We encourage disagreement and healthy debate, but please refrain from personal attacks on our WordPresss and contributors.
  8. Finally: Participation in this forum may be terminated by Equifax immediately and without notice for failure to comply with any guidelines or Terms of Use. As such, you should familiarize yourself with all pertinent requirements prior to submitting any response through the blog or otherwise. All opinions expressed in this forum are solely those of the individual submitting the comment, and don't necessarily represent the views of Equifax or its management.

Equifax maintains this interactive forum for education and information purposes in order to allow individuals to share their relevant knowledge and opinions with other members and visitors. We encourage you to participate in discussions about personal finance issues and other topics of interest to this community, but please read our commenting guidelines first. Equifax reserves the right to monitor postings to the forum and comments will be published at our discretion. Do you have questions or comments about your Equifax credit report or customer-service issues regarding an Equifax product? If so, please contact Equifax directly. All opinions and information expressed or shared in blog comments are solely those of the person submitting the comments, and don't necessarily represent the views of Equifax or its management.


Retirement Archive

Stay Informed Sign up for our FREE Equifax email Newsletter