Investing 101: What Is Rebalancing Your Portfolio?
When you first set up your investment portfolio, you choose and set an asset allocation. This refers to how you invest across different asset classes like stocks, bonds, and other securities.1
The purpose of asset allocation is to help balance risk and reward, and to make sure you're properly diversified. However, when markets go up or down, it can impact the allocation within your portfolio — and that's where rebalancing plays a role in keeping your investment on target.
What causes the need to rebalance?
Depending on whether we're in a bull market or a bear market, the prices of securities like stocks and bonds will rise and fall. This kind of market movement over time is normal. Even market volatility, while unpleasant to experience in the moment, is still an expected part of the investment experience.
But as this happens over time, you might end up with more of one type of security than you need in your portfolio. When financial advisors rebalance investment portfolios, they're making adjustments to bring the various asset classes within your portfolio into alignment with the original asset allocation.
Rebalancing your investment portfolio is a systematic way to "buy low and sell high."
Let's say you started with an asset allocation of 60 percent stocks and 40 percent bonds. As the prices of securities fluctuate over time, you could end up with 80 percent stocks and 20 percent bonds.
Drifting away from the ideal asset allocation is problematic because it can make it harder to properly diversify investments. Changes in asset allocation can also leave you taking on far too much risk — or too little.
Rebalancing is the process you can use to readjust the assets in your portfolio. It also helps ensure you follow one of the most important rules to successful investing.
Periodic rebalancing: A key to successful investing
Ever heard the saying "buy low and sell high" as it relates to investing? This is what rebalancing helps you do in a systematic way.
If your stocks climbed from 60 percent of your portfolio to 80 percent, it likely means those assets are doing well — and rebalancing means selling them and buying more bonds to bring your portfolio back to the desired 60/40 allocation. Most investors find it really difficult to sell their "winners," but this is exactly what you should be doing: selling high!
In addition, because you are buying more of whatever isn't doing so well, you get to buy low, which is essentially like getting a sale on those securities. As their value goes up, then you again get the chance to sell high and make your profit.
While nothing about this process — or anything else with investing — is guaranteed, rebalancing can help you stay on track in a way that keeps your emotions out of the decision-making process.
When should you rebalance?
You don't need to try and rebalance your portfolio the moment your asset allocation drifts even the slightest bit away from your set target. Too much tinkering with your investments can lead to mistakes. The reason: the more often you look at your investments, the you likely you are to make irrational decisions and poor choices. In fact, this a big reason why average investors tend to underperform the market.2
Most investors will want to rebalance only once or twice each year. While there's a benefit to periodically adjusting your portfolio to stay on track with your long-term goals, there's no benefit to rebalancing more frequently. If you do an annual check-in with your financial advisor, this is a great opportunity to discuss specific recommendations on moves to make with your portfolio.
An annual meeting gives you a chance to review your investment performance and evaluate changes in your life that might impact whether your investment strategy needs adjusting. This is also the time to get expert advice on how to rebalance your portfolio to bring it back into alignment with your target asset allocation.
If it's time to rebalance your portfolio and get a second set of eyes on your investment plan, consider talking with an advisor at Synovus who can give you the financial advice and guidance you need to meet your goals.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.Diversification does not ensure against loss.
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