When to rebalance your portfolio

An important part of investing is determining the right mix of asset types in your portfolio, such as stocks, bonds and real estate. However, asset prices don’t always move in lockstep, so their relative weighting will shift over time as prices fluctuate.

Staying on track toward your financial goals requires rebalancing your portfolio from time to time. But what does this involve, and how do you know when to adjust it?

What does it mean to rebalance a portfolio?

Portfolio rebalancing is when you realign the assets in your portfolio to maintain an investment mix that supports your financial goals and risk tolerance. The aim of rebalancing is to mitigate volatility and manage potential risk in your portfolio. It’s a negotiation between risk and reward that can help your portfolio stay on track amid market highs and lows.

How to rebalance your portfolio

Rebalancing involves selling assets that have appreciated beyond your long-term target weighting and purchasing assets that have fallen below your target level. There are two main rebalancing strategies:

• Periodic time-based rebalancing. A portfolio is rebalanced at regular intervals, such as annually or quarterly, irrespective of asset price movements.
• Threshold or price-based rebalancing. A limit is set on how far the portfolio can deviate from your desired target mix, such as a 60/40 stocks-to-bonds mix.

Both rebalancing strategies may help reduce the risk investors experience in both annual return variability and the magnitude of portfolio value declines.

When should you rebalance your portfolio?

There’s no simple answer to the question of when you should rebalance your investment portfolio, but here are four situations when rebalancing might be a wise strategy.

Rebalance your portfolio when there’s market volatility

• Stocks are trending upward
• Stocks are trending downward

Market volatility is one of the most common reasons investors look to rebalance their portfolios. Volatility-triggered rebalancing can help monitor how far your portfolio has strayed from your target goals.

A financial professional can help you develop “drift parameters” to define the amount of volatility you’re comfortable with. This is a mechanism to determine whether volatility should trigger rebalancing. If you’re having double-digit gains or double-digit losses, for example, this could present an opportunity to rebalance.

Portfolio rebalancing allows your holdings to change with the market environment. Consider a portfolio with a target mix of 60% stocks and 40% bonds. If the market is favorable to stocks, you might increase your stock holdings. However, if stock holdings inch up toward 70%, you might want to consider rebalancing again. This approach lets the market have some volatility but identifies when it has reached an extreme for you.

Market volatility might warrant rebalancing, but you should avoid overreacting to media reports about unsteady markets. Treat these reports as a chance to spark a conversation with your financial professional.

Rebalance your portfolio when you experience major life events

• You’re approaching retirement
• You’re expecting a child
• You’re buying a house
• You’ve experienced a major health event

Major life events might compel you to check in on your investments and rebalance as necessary. It’s possible you’re already pursuing a balanced, diversified investment strategy that works with your changing priorities. Even so, as major milestones approach, it never hurts to review your holdings.

Some life events may result in a sudden influx of cash for you to invest. For example, you may receive an inheritance after a family member passes away. If there’s more money to invest, rebalancing becomes a part of the process. From a return perspective, it may be wise to invest any windfall fully and right away, rather than waiting or investing over the course of a year or two.

Some life changes can trigger a wholescale reevaluation of your financial goals. If something truly unexpected happens, such as a health crisis, you might need to do more than tinker with your portfolio. In these cases, rebalancing can help you ease into an entirely redesigned portfolio tailored to your new needs.

Rebalance your portfolio when you have diversification concerns

• You’re concerned your portfolio isn’t adequately diversified
• You’re considering adding a new asset class to your portfolio

Diversification is the key to a well-performing portfolio. If you have a sneaking suspicion that your portfolio isn’t well diversified, it might be time to talk with your financial professional about rebalancing.

Similarly, if you’re curious about new or emerging investment opportunities — such as international stocks or holdings in emerging technology companies — you might consider rebalancing your portfolio to incorporate these new assets.

Rebalance your portfolio when you haven’t rebalanced in a while

• It’s been more than a year since your last rebalancing conversation
• You’ve been distant or checked out from your investments for a while

Quite simply, if you haven’t rebalanced your portfolio lately, you may want to initiate a conversation with your financial professional about rebalancing. It’s a good idea to review your portfolio on a quarterly or annual basis. This reassessment may not lead to any activity, but at least you’ll know you’re on track.

Checking in on your investments regularly can help you decide when to undergo a portfolio rebalance and stay up to date on your portfolio’s performance. This method takes some of the emotion out of the investing process and can help you invest dispassionately, rather than react to market fluctuations.

Does portfolio rebalancing include costs?

There are plenty of benefits to rebalancing your portfolio, but it’s also important to note the transaction costs. If you’ve had just a small deviation around 1% or 2% from your desired target mix, the transaction costs might outweigh the benefits.

Rebalancing your portfolio with a financial professional

A financial professional can draw on experience and analytical tools to help ensure rebalancing activity is appropriate for your situation. Having this extra layer of analysis can help you feel confident in the moves you’re making.

In the end, rebalancing is a key practice for all investors. Knowing when to rebalance your portfolio can help ensure your money is working as hard as you are.

Your investment strategy should reflect your goals, risk tolerance and time horizon. Learn how our approach to investment management can help you work toward your vision of success.