Rebalancing – Five Considerations to Keep Your Portfolio from Drifting Out to Sea

Rebalancing is a fancy term for making sure your portfolio maintains its target allocation over time (click here for info on considerations to determine your ideal allocation).

For example, let’s say that you decide that your ideal investment allocation is 70% risk assets (equities/alternatives)/30% low risk assets (fixed income/bonds/cash).

If the risk assets perform well, you will need to sell some of them to maintain your target allocation. Inversely, if they do poorly, you will need to buy more. Easy in theory, hard in practice. As is the case with most things in life, discipline and a plan that you can follow is the best way to ensure that your investments don’t go too far off course.

Here are five keys to keeping things on track:

  1. Have a written plan: Just writing something down can be a powerful tool to ensure success. For example – if my risk assets drop 10%, I will buy. If they go up 10%, I will sell and re-allocate to low-risk assets. 
  2. Don’t do too much: Most investors get themselves in trouble be doing too much, not too little. A good rule of thumb is to look at your accounts occasionally, and trade rarely. If you complete item 1, it makes this much, much easier to do. 
  3. Consider Taxes: Anytime you trade, you will have costs, and those costs are not always evident. Be sure to stay abreast of any possible tax costs from rebalancing. This tends to be of greater concern when the market is appreciating, and you are selling the risk asset to build up the low-risk assets in your portfolio. Realizing taxes isn’t always a bad thing and might actually be in the best interest of your portfolio. Gifting appreciated stocks to charity or a Donor Advised Fund can also help solve the tax riddle. 
  4. Remove emotions: This is much easier said than done. The best way to remove emotions is to think back to how you constructed your portfolio and the rationale behind each of its components. It might not feel great “selling the winner and buying more of the loser” but that is exactly what disciplined portfolio management and prudent rebalancing is. 
  5. Buy a fund that does it for you: the easiest route is to take the whole task off your hands, there are a number of diversified fund options available in very low-cost wrappers that do the hard work of rebalancing for you. When in doubt, automate it out!

Want to learn more about rebalancing your portfolio? Schedule a call with us. 


This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.

Frankly Finances is a registered investment advisor with the state of Florida and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure for additional information regarding the qualifications and business practices of Frankly Finances.

Related Post

Leave a Reply