Investment Read Time: 2 min

Why Regular Rebalancing Makes Sense

Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach?

It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent – and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio has its risk profile shift over time.

When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance – that allocation – would remain steady for a period of time. But if the investments have varying returns, over time, the portfolio may bear little resemblance to its original allocation.

Rebalancing is the process of restoring a portfolio to its original risk profile. But remember, asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss.

There are two ways to rebalance a portfolio.

The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have underperformed.

For example, if one investment fell from 40% of a portfolio to 30%, consider purchasing more of that investment to return the portfolio to its original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.

The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.

Keep in mind, however, that the information in this material is not intended as tax advice, and may not be used for the purpose of avoiding any federal tax penalties. Please consult your tax professional before rebalancing. Rebalancing by selling “winners” may result in a taxable event.

Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Retirement Victory Lap

Retirement Victory Lap

A confident retirement begins with a plan.

Long-Term-Care Needs

Long-Term-Care Needs

Determine your potential long-term care needs and how long your current assets might last.

Financial Fixes: From Health Scare to Financial Care

Financial Fixes: From Health Scare to Financial Care

A medical scare can be a wake-up call in terms of your physical and financial health. Here’s how to strengthen your finances

 

Have A Question About This Topic?







Thank you! Oops!

From Seeking Yield to Seeking Profits

How low can you go? We’re not talking about the limbo. We’re referring to sovereign bond rates.

Business Boosters: Tips for Building a Team

Here are a few tips on how to recruit, hire and onboard employees who fit your culture and share your passion to succeed.

Retirement Planning With Your Special Needs Child in Mind

Having a special needs child adds another layer of complexity to retirement planning. A special needs trust may help.

View all articles

Capital Gains Tax Estimator

Use this calculator to estimate your capital gains tax.

Disability Income

This calculator estimates your chances of becoming disabled and your potential need for disability insurance.

Can I Refinance My Mortgage?

This calculator can help determine whether it makes sense to refinance your mortgage.

View all calculators

Long-Term-Care Protection Strategies

The chances of needing long-term care, its cost, and strategies for covering that cost.

Managing Your Lifestyle

Using smart management to get more of what you want and free up assets to invest.

Your Cash Flow Statement

A presentation about managing money: using it, saving it, and even getting credit.

View all presentations

Estate Management 101

A will may be only one of the documents you need—and one factor to consider—when it comes to managing your estate.

When the Unexpected Becomes Reality

Disability happens to more people, more often than you may think, and it lasts longer, too.

Questions to Consider When Buying a Vacation Home

Doing your research is key before buying a vacation home.

View all videos