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Pekic/Getty Images July 26, 2022 Gio Moreano is a contributing writer, covering investment topics that help you make smart money decisions. Formerly an investing journalist and lead analyst for CNBC, he is passionate about financial education and empowering people to reach their goals. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our investing reporters and editors focus on the points consumers care about most — how to get started, the best brokers, types of investment accounts, how to choose investments and more — so you can feel confident when investing your money. Investing disclosure: The investment information provided in this table is for informational and general educational purposes only and should not be construed as investment or financial advice. Bankrate does not offer advisory or brokerage services, nor does it provide individualized recommendations or personalized investment advice. Investment decisions should be based on an evaluation of your own personal financial situation, needs, risk tolerance and investment objectives. Investing involves risk including the potential loss of principal. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. For many of us, investing is how we , college education and other life events. After setting our financial goals and building a diversified portfolio, we can watch our investments grow over time. But as the years go by and situations change, we may need to adjust those investments. That’s where portfolio rebalancing comes in. Essentially, portfolio rebalancing acts as a tune-up for your investments. It ensures your risk tolerance aligns with your long-term financial goals and gives you a chance to review the types of investments you hold. How portfolio rebalancing works
When it comes to rebalancing, the first step is to . Asset allocation is the mix of investments you own such as stocks, bonds, funds, real estate and cash. This asset allocation considers your risk tolerance and financial goals. Someone who is more risk-tolerant might have a higher allocation to historically risky assets like stocks or cryptocurrencies. On the other hand, a risk-averse investor might opt to have a higher weighting to less volatile asset classes like bonds or real estate. When constructing a portfolio, the key is to understand how each asset class may impact your overall performance. By having a balanced portfolio, you are mitigating your risk of capital loss while increasing the likelihood of generating returns. Once you determine your optimal asset allocation, there is a good chance those weightings will change as gains and losses accumulate. Consider a portfolio composed of 60 percent stocks and 40 percent bonds at the start of the bull market in 2009. By now, that asset allocation would have changed to about 85 percent stocks and 15 percent bonds. Why? Because the stock market has significantly outperformed the bond market since then. For an investor close to retirement, such an asset allocation could be too aggressive, especially if the stock market were to face a lengthy bear market. By taking the time to review and adjust to your asset allocation, you might also become aware of potential opportunities to buy low and sell high. Types of portfolio rebalancing
There are various strategies for rebalancing your portfolio. The type of strategy you use depends on your investment goals and life stage. For example, starting a family may mean you want to allocate more of your money toward a . Planning to buy a house might mean . Getting a promotion might translate to maximizing your retirement accounts. Once you determine your financial objective, you can calibrate your portfolio accordingly. For most investors, the most common reason to rebalance a portfolio is diversification. Through this strategy, you seek to ensure asset allocations remain consistent and in-line with your investment goals. Another strategy for asset allocation is called “smart beta,” where you use a combination of professionally managed index funds and thematic investments. With , for example, investors are able to mimic the performance of a basket of stocks that make up an index . In this case, an investor would purchase an exchange-traded fund (ETF) or a mutual fund. Through one of these investments, you gain exposure to all the stocks in that index. Another option is . There are thousands of them tracking investment themes such as 5G technology, electric vehicles, cloud computing, cybersecurity and sustainability — to name a few. But contrary to index funds, where fund managers follow an index, active investing is tied to a fund manager’s ability to select stocks. As a result, these types of investments tend to be more volatile. When rebalancing a portfolio, you may opt to add a combination of index and thematic investments to your stock allocation. By employing one or both strategies, the key is to keep fees low and remain diversified. The importance of rebalancing a portfolio
Markets change, meaning your portfolio will need to change as well. Not doing so can lead to losses you might not have expected. Returns will fluctuate, as will their weighting in your portfolio. For example, investments that were once considered safe could turn speculative in a couple of years and you will need to adjust accordingly to retain your risk tolerance. An investment you once considered low-risk and held, let’s say, 20 percent of your portfolio might turn risky in five years. Your weighting should then change to a lower amount to accommodate. If you believe in the long-term value of certain investments, and have a lengthy time horizon, then holding on might not be a bad idea. If you, however, hold certain investments with the intent of maintaining a low risk profile, then you’ll likely need to rebalance your portfolio to reflect market movements. Depending on what your investment goals are, not rebalancing your portfolio can see you incur significant losses that you might not be prepared for. It’s important to constantly keep up with your portfolio and the status of your investments. How often should you rebalance
There is not a hard-and-fast rule on when to rebalance your portfolio. But many investors make it a habit to revisit their investment allocations annually, quarterly, or even monthly. Others decide to make changes when an asset allocation exceeds a certain threshold such as 5 percent. shows there is no optimal rebalancing strategy. Whether a portfolio is rebalanced monthly, quarterly, or annually, portfolio returns are not markedly different. Actually, by checking your investments too frequently, you might end up making emotional decisions in the moment instead of sticking to your long-term goals. Several studies of behavioral finance reveal investors might be tempted to alter asset allocations based on market volatility instead of their financial goals. Despite how often you check, the objective is to maintain a balanced risk profile over time. Does rebalancing your portfolio cost money
For the do-it-yourself investor, rebalancing a portfolio these days can be done at low or no-cost. , while low-cost options abound. Automated investing has also made portfolio rebalancing simple. as part of their service based on investors’ profiles. Many investors are still most comfortable working with a financial advisor. Of course, that personalized attention may come at a higher cost. For retirement planning, it’s worth noting that target-date funds — mentioned earlier — usually come with a slightly higher cost than pure index funds. Also, certain mutual funds might have early redemption fees, or even . A load fee is a commission an investor pays when buying or selling mutual funds. These fees are determined by mutual fund companies and their intermediaries. When deciding, it’s important to take note of these costs upfront. The more you can minimize unnecessary fees, the more you can invest toward your financial future. Tax considerations when rebalancing
If you need to sell assets to rebalance your portfolio, take time to consider any tax implications. Instead of selling, investors may also stop making new contributions to certain asset classes and redirect those funds to underweighted holdings as a way to rebalance over time. This strategy minimizes potential tax liabilities. When rebalancing, it’s paramount to pay attention to the type of account your assets are in and the length of time you’ve owned them. These factors will determine . For example, rebalancing your assets in tax-advantaged accounts like a , , may not incur any short- or long-term capital gains taxes. Alternatively, capital gains generated in standard investment accounts are taxed differently by the US government. Before making any changes, you may want to consult with a tax professional. Rebalancing for retirement
Outside of personal investment accounts, retirement accounts deserve special attention as your age will primarily determine how assets should be allocated. The principles and strategies for rebalancing a portfolio are essentially the same. However, by taking a holistic view of all of your retirement accounts (, , ), you might discover that your desired asset allocation is out of proportion. When dealing with multiple accounts, consider consolidating all of them with an online portfolio tracker, or by keeping them at the same financial institution. Even if your accounts are actively managed, having them under one view should make it easier to track. could also be advantageous for those investors who prefer a more hands-off approach. These managed funds change the risk profile based on your expected retirement age, selecting more conservative assets as you get older. Bottom line
Rebalancing your portfolio is a great way to be in tune with your finances. It ensures you remain diversified and on track to reach your long-term financial goals. By staying engaged, you will feel more empowered to make better investment decisions and avoid potentially costly mistakes. Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. SHARE: Gio Moreano is a contributing writer, covering investment topics that help you make smart money decisions. Formerly an investing journalist and lead analyst for CNBC, he is passionate about financial education and empowering people to reach their goals. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles