What Is Rebalancing?

Rebalancing involves periodically buying and selling investments in a portfolio to ensure that its asset allocation continues to fit an investor's risk tolerance and investment objectives.

The goal of rebalancing is to adjust for market fluctuations and make sure no single asset or asset group gains an outsized weight in your portfolio,ꩵ keeping tꦑhe balance of assets in line with your goals and preferences.

It is considered good practice for investors to rebalance their portfolios annually. This article overviews everything investors should know about rebalancing.

How to Rebalance Your Portfolio 

When you rebalance your portfoli𒉰o, consider these que𒐪stions:

• How much has my portfolio deviated from my original asset allocation?
• Am I still comfortable with my original asset allocation, or has my situation shifted, suggesting that I amend the asset mix?
• Have my goals and/or 澳洲幸运5开奖号码历史查询:risk tolerance changed? If so, does my allocation reflect these changes?
• Does my current asset allocation actually work for me? Does my portfolio even need tweaking?

Ways to Rebalance Your Portfolio

There are several 澳洲幸运5开奖号码历史查询:rebalancing strategies:

• Select a percent range for rebalancing, such as when each asset class deviates 5% from its preferred weight. The window of drift tolerance can be as low as 1% or 2%, or significantly higher than 5%. The exact number will depend on your tolerance and the time you're willing to dedicate to keeping the portfolio compliant with the set allocation.
• Set a time to rebalance. Once a year is sufficient for most investors, although some prefer to rebalance quarterly or twice per year. There’s no wrong or right strategy, although less frequent rebalancing will potentially lead to greater stock allocations and higher overall returns, along with greater volatility.
• Add new money to the underweighted asset class to return the portfolio to its original allocation.
• Use withdrawals to decrease the weight of the overweight asset. If stocks have increased 1%, sell a portion of the overweight stocks and withdraw the proceeds. 

Steps to Rebalance Your Portfolio

It is good practice to stay on top of major changes to your portfolio. You can maintain your records in a spreadsheet or use a free or paid 澳洲幸运5开奖号码历史查询:portfolio management solution like Quicken or Sharesight.

Once you've listed your assets and calculated their percentage weights, you can rebalance as needed.

Step 1: Compare 

Compare the current a♌sset values and weight percenta♔ges of each asset class with your predetermined (or newly desired) asset allocation.

Step 2: Assess

Notice the difference between your actual and preferred asset allocation. If your 80% stock, 20% bond portfolio has drifted to 85% stocks, 15% bonds, then it’s time to rebalance, eith💖er by adding new money into bonds, or by selling stocks and buying bonds.

Step 3: Sell

Assume your portfolio is worth $100,000. Given the drift above and a desired 80%/20% balance, to reduce your percentage of stocks by 5%, you’ll sell $5,000 worth of stock investmen🍬ts.

Step 4: Buy

With the $5,000 proceeds from the stock sale, you can now buy $5,000 of bonds. This will return your portfolio to its preferre𝕴d 80%/20% mix.

Step 5: Add Funds

Let’s say that you decide to add $10,000 to your portfolio. Its value would then b🌱e $110,000 and the desired 80%/20% asset mix would now require $88,000 in stocks and $22,00🐻0 in bonds.

(Multiply $110,000 by 80% for the stock allocation and 𝓀$110,000 by 20% for the bond allocation to a♌rrive at these dollar goal amounts).

Step 6: Invest New Funds

Recall that you currently have $85,000 in stocks and $15,000 in bonds. To achieve the 80%/20% balance desired (which requires $88,000 in stocks and $22,000 in bonds), invest $3,000 of your added cash in stocks and $7,000 in bonds.

How to Use a Robo-Advisor to 🅰Rebalance Your Portfol♋io

A robo-advisor can be a g🍌reat solution for those who prefer to outsource portfolio selection and reba🌃lancing.

Robo-advisors such as Wealthfront and 澳洲幸运5开奖号码历史查询:Schwab Intelligent Portfolios are designed to offer investors access to well-diversified investment ꧙portfolios, rebala𝐆ncing, and other features, such as tax loss harvesting, with low or no management fees.

The 澳洲幸运5开奖号码历史查询:most popular robo-advisors administer a quick survey to determine your investment goals, timeline, and🏅 risk. This survey drives the makeup of your investment portfolio.

After investing, robo-advisors will rebalance your holdings on an as-needed basis, to📖 keep your portfolio in line with the initial survey parameters.

Pros and Cons of Portfolio Rebalancing

Investment ma🍸nagement, which involves rebalancing, requires effort. You’ll need to keep close track of your investments to make certain that they continue to meet your objectives.

You might choose to increase the stock allocation if you’re comfortable with greater risk. Or, you may want to increase the fixed income allocation to preserve capital if you’re nearing retirement or are uncomfortable with occasional double-digit declines in your portfolio's value.

Additional Tips to Rebalance Your Portfolio 

Here are additional tips to aid in rebalancing:

• Avoid checking your investment values too frequently (such as daily or weekly). You might feel the need to act, which may lead to 澳洲幸运5开奖号码历史查询:overtrading and inferior investment returns. 
• If you didn't when you originally built your portfolio, create a personal investment policy statement or investment plan, which includes your investment mix, asset allocation, and rebalancing parameters. Stick to it.
• Minimize tax events generated by taxable accounts. This involves tax loss harvesting (selling losing positions to offset capital gains). 
• Maintain a bif picture focus to reach your long-term goals. Don't be distracted by changes in the value of your investments.

Remember that investing is about turning today's earnings into future financial security.

Investing and rebalancing are designed to increase your returns over time, such as ten or more years. For shorter-term goals, consider a certificate of deposit or 澳洲幸运5开奖号码历史查询:high-yield money market account.

The Bottom Line

R🌟ebalancing will maintain your preferred asset 𝓰allocation and help to smooth out the volatility of your portfolio.

When stock prices soar, rebalancing will force you to take some profits. When prices aꦬre lower, and an asset class declines in v๊alue, you’ll have an opportunity to buy at lower levels.

Less frequent rebalancing saves you time and might allow your winning assets to grow for a bit ൩longer.