Rebalancing accounts to their strategy benefits clients by eliminating dispersion across accounts at the portfolio management level. This allows managers to monitor the performance of their plan and ensures account allocations are in line with the stated strategy. If a manager's approach is optimal, any divergence in the portfolio from the strategy allocation is not desirable. Rebalancing helps maintain portfolio risk, especially when an investment strategy has remained unchanged. Rebalancing also provides opportunities for new investments.
Not all stocks are perfectly correlated when capital market expectations change and the economy fluctuates. On the other hand, if stock market volatility keeps you up at night, then you can err on the side of caution by allocating more money to bonds or even to cash.
A portfolio that is balanced for me may not be — and is probably not — balanced for you! Once you've determined your target asset allocation and have created a balanced portfolio, the next logical question is, "When should I rebalance my portfolio? There are two general ways to approach rebalancing.
You can either rebalance your portfolio at a specific time interval say, yearly , or you can rebalance only when your portfolio becomes clearly unbalanced.
There's no right or wrong method, but unless your portfolio's value is extremely volatile, rebalancing once or twice a year should be more than sufficient. When market values plunge, instinct tells us to sell our holdings before conditions get worse.
And, when market values only seem to rise and "everyone" is making money, that's when we want to put our money into the market. This is human nature, but it is also the exact opposite of buying low and selling high.
Being essentially forced to sell high and buy low is one of the most significant benefits of maintaining a balanced portfolio over time. Restoring balance to your portfolio could involve selling some of your bond investments and buying stocks while they're cheap.
Establishing a balanced portfolio and taking steps to keep it that way can help you to avoid relying too much on emotions when making important investment decisions. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. By taking a systematic approach and revisiting your asset allocation at planned intervals, you can take some of the emotion out of investing and ensure a balance of securities that makes sense for you.
Unsure about rebalancing? Try our Robo Portfolio that automatically rebalances your portfolio for you. This icon indicates a link to a third party website not operated by Ally Bank or Ally.
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What is an ETF? What is portfolio rebalancing? Portfolio rebalancing is a best practice recommended by many renowned investors and is strongly linked to the buy and hold approach. The fundamental idea of buy and hold is to avoid excessive trading. Instead, you define a strategic asset allocation and follow it over years. This sets it apart from stock-picking and market timing.
But keeping the same portfolio strategy over years is a challenge in its own right. Even without active changes to your portfolio, its structure will drift over time. This is due to the market movements of the single portfolio positions. It can cause a major misalignment of your originally planned strategic asset allocation. If this happens, it is time for rebalancing.
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