Annual adjustments keep your investment strategy on track
If your investment portfolio isn’t performing as well as you’d like, consider giving it a tune-up by rebalancing.
“Rebalancing,” defined by the financial education website, Investopedia, is the “process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original state.”
It’s a sound way to ensure your investments continue to reflect your financial goals and risk tolerance.
Why rebalance? When first setting up your investment portfolio, you divvy up assets into different classes such as equities (stocks), fixed income (bonds), and cash—all based on your tolerance for risk.
Over time, the weighting in each asset class changes as different portfolios earn different returns. Let’s say your original allocations included 65% stocks and 35% bonds. If the market has posted strong gains, your current allocations might now reflect 70% stocks and 30% bonds.
Rebalancing brings allocations back in line with your original mix. Or should your investment goals change—as you near retirement, for example, you can rebalance your portfolio to reflect a lower risk tolerance.
How to rebalance. Investopedia suggests a simple record, compare, and adjust strategy: Record your original securities in each asset class and the value they hold in the portfolio. Choose a timeframe—many experts suggest annually—to compare the current value of each asset class to its original value. Then adjust when necessary.