With the big drop in the stock market last month, this is the best time to rebalance your investment portfolio.
Today we are going to discuss the topic of Rebalancing your portfolio and why it is so important. I will explain to you how a continuously rebalanced portfolio is one that is constantly buying low and selling high.
“Rebalancing -The process of realigning the weightings of one’s portfolio of assets. Rebalancing involves periodically buying or selling assets in your portfolio to maintain your original desired level of asset allocation.”
Rebalancing for Dummies
Rebalancing can be very complex and confusing, but I will give a simple example to explain some of the benefits.
For example, lets say you have a retirement portfolio with $50,000 invested in stocks, and $50,000 invested in bonds. This is the 50/50 portfolio which is pretty safe and best for those close to or in retirement. So you let it go 1 year and lets say it was like 2019 and stocks had a great year. After 1 year you now have about $65,000 in stocks and $51,000 in the fixed portion. You are no longer invested like you wanted to be, and are opening yourself up to way more risk than you originally planned on. Rebalancing is then needed to sell off what is high, which is stocks, and buy into what is low, bonds. The beautiful thing about it is, there is never a time when rebalancing forces you to buy high, or sell low.
Why doesn’t everyone rebalance?
Rebalancing never seems like the right thing to do at the time. For example in 2008, or like we have seen in the last few months, when stocks were plummeting, rebalancing is selling safe fixed income to buy stocks. If you think about it though, you are buying low and selling high. Buying stocks low in a market like we have today can give you a huge advantage long term.
So by rebalancing a portfolio, what you are really doing is lowering the risk and keeping to your individual risk preferences. That is really the main goal of rebalancing, but an added benefit is being able to consistently buy low and sell high. This can help over the long term to increase your return as well.
Take a look at this chart by Forbes which visually explains all of this.
You can see from the chart that rebalancing really does its work when the downturns in the market come. The chart shows that the rebalanced portfolio made more than the portfolio that was left alone, and with much lower risk.
Make sure that your money is invested with an investment coach that has a scientific and predetermined way for rebalancing your hard earned money.
The portfolio’s we use with our clients are automatically rebalanced quarterly at the beginning of each quarter.
By Jimmy Hancock
1.”Rebalancing Definition | Investopedia.” Investopedia. Investopedia US, n.d. Web. 17 Sept. 2014. <http://www.investopedia.com/terms/r/rebalancing.asp>.
2. Brown, Janet. The Impact of Rebalancing. Digital image. Forbes.com. Forbes, 16 Nov. 2011. Web. 17 Sept. 2014. <http://www.forbes.com/sites/investor/2011/11/16/does-portfolio-rebalancing-work/>.