Investment Guidance: 4 Reasons to Rebalance Your Portfolio

By Teresa Conley | June 14, 2018

You've heard the old saying, "don't put all your eggs in one basket"... when it comes to investing, perhaps no other cliché could be more appropriate. 

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyA properly diversified portfolio is an effective way to mitigate risk, and deal with the ups and downs of a volatile market. And the best way to get truly diversified? Regular portfolio rebalancing to ensure that your assets are properly allocated across asset classes.

Here are four benefits associated with rebalancing your portfolio. 

1. Risk and Reward: Portfolio Managers Weigh In

There's another old saying that's quite apropos in any investment discussion: There's no reward without risk. Asset allocation takes this truth into account, and attempts to strike the right balance between risk and reward within your investment portfolio. But how does a portfolio, especially a thoughtfully planned portfolio, reach a state of imbalance in the first place?

Because, inevitably, certain asset classes will perform better than others at certain times. This leads to an unbalanced portfolio that's skewed toward either too much risk or not enough risk, depending on your long term financial plan and your personal level of risk tolerance. 

For example, your portfolio may have a target allocation of 60 percent stocks and 40 percent bonds and cash. If the market swings upward and equities rally, you may find yourself with a 75/25 allocation. If the market continues to soar, that's OK... but the market is, by nature, volatile, and if it drops, you're exposed to too much risk. You need to rebalance.

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County2. Investment Guidance: Discipline and Portfolio Rebalancing

Self-discipline is an important factor in investing; after all, it takes discipline to stay the course, to keep your eye on your long term goals, and not react with emotion to every market swing. Rebalancing reinforces that discipline. 

How? Because when you rebalance, you're selling some over performing stocks — i.e., your "winners" — and putting them into under performers. Selling your high performing stocks may seem contradictory, and it's certainly not an easy thing to do. However, it's necessary in order to protect your portfolio. Remember, performance will shift over time, and what's doing well today may not be doing so well a year from now. 

Rebalancing keeps you on track and helps you adhere to your long term, comprehensive financial plan. Working with your trusted wealth advisor to create a written investment plan that details your target asset allocation will help you stay the course. Outlining your high and low percentage ranges provides you with a guide to trigger a rebalance.

3. Asset Management Solution: Rebalancing Time is Reviewing Time

Portfolio rebalancing time is also an ideal time for a complete review. This will help validate your investment strategy, and bring any necessary adjustments to light. Questions to ask during a review may include: 

  • How are my mutual funds and ETFs performing compared to the overall market?
  • Are my funds' expense ratios appropriate?
  • Are my stocks hitting my growth targets?

4. Stay Focused on Your Comprehensive Financial Plan

We've already discussed the need to focus on the long term, but keep in mind that your financial plan is simply a tool to help you meet your financial goals. A properly constructed comprehensive financial plan will incorporate asset allocation targets, align your investment strategy with your financial goals, set a time horizon for your investments, and take your risk tolerance level into account. 

Working with a trusted fee only financial advisor can help you discover the asset management solutions that will allow you to keep your portfolio balanced and diversified.

Posted in Investment Guidance