Is It Time to Rebalance Your Portfolio?

One of the major advantages of asset allocation is the ability to reduce the risk in your investment portfolio by determining the percentage of various asset classes that will be held. Unfortunately, you can’t just make that allocation once and forget about your portfolio. Since different asset classes have varying rates of return, over time your asset allocation will stray from your desired allocation. And in periods of strong bull markets, which I have experienced in the past three years, you may find that your current allocation is vastly different than your desired allocation. Some factors to consider include:

  • Review your portfolio at least annually. Compare your current asset allocation to your desired allocation. Make a conscious decision about how much variation you are willing to tolerate in your portfolio.
  • You can also use this annual review to determine if changes need to be made to your overall allocation strategy. However, don’t simply change your allocation because you don’t want to sell an asset that is performing well. Allowing an asset class to become more predominant in your portfolio may also increase the risk in your portfolio, something you are trying to reduce through your asset allocation decision. Rebalancing may help ensure that you are not overly dependent on one asset class.
  • Keep in mind that there are other ways to rebalance a portfolio besides selling assets, which may generate tax liabilities. If you are making periodic investments, you can change how new investments are allocated. Periodic dividend payments and capital gains can be invested in other asset classes rather than reinvested in the same asset. Withdrawals can be made from over weighted asset classes. Rebalancing within tax-deferred accounts will generally not generate tax liabilities.
  • Also review your allocation within asset classes to make sure that one or two investments are not dominating that portion of your portfolio. You should monitor your level of diversification both within and among asset classes.

Periodically rebalancing your portfolio is an important component of your asset allocation strategy. With the strong performance of the stock market over the past three years, now may be a good time for a review. Please call if you’d like help rebalancing your investment portfolio.