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Rebalancing - Part One:
What It Is and Why It's Essential

When is the last time you rebalanced your portfolio? Let me explain exactly what rebalancing is and why it is so important

You finally set up your investment portfolio. You researched the funds, chose your asset allocation, and authorized a certain percentage of your paychecks to be direct deposited into your investment portfolio. You can pat yourself on the back, but you also must shift into the monitoring stage of investing. Over time, your initial stock/bond allocation, say 60%/40% for example, will drift to 70% stocks or perhaps even to 50% in bonds through normal price changes. That's where rebalancing comes in. I like to think of it as being in the wilderness and hiking to a lake you heard had great fishing. If you initially check your GPS and set off in the right direction for 5 miles without rechecking the GPS, you will likely end up in the wrong place. Rebalancing is the GPS that keeps you on track so you can efficiently meet your investment goals. It does this in two ways:

  1. Rebalancing helps you maintain the risk level you signed up for. Let's say you are comfortable with a 60/40 stock/bond portfolio mix. That reflects your risk tolerance. If you let your portfolio drift to 80/20, the volatility of your portfolio will increase. While it may seem counterintuitive to sell stocks that have been recently performing above expectations, doing so is essential to maintain your targeted risk level and has the benefit of realizing the gains in those holdings. Rebalancing in this fashion helps to automate the process of buying low and selling high.
  2. Rebalancing helps you stick to your long-term investment plan. If your asset allocation drifts and your portfolio becomes more volatile, you will be more exposed to stock market corrections. Losing a significant part of your portfolio can disillusion you and possibly deter you from your long-term goals. By rebalancing the portfolio, you are more likely to stick with your investment plan even in market downturns and meet your long-term financial goals in the expected time frame.
  3. Rebalancing helps you achieve better returns. Research has shown that, historically, when compared to sporadic rebalancing or the complete lack of rebalancing, systematic rebalancing will improve the risk-adjusted returns of your portfolio.
Rebalancing is essential. However, if you would rather be stuck in the wilderness without a GPS than rebalance your own portfolio, I can help. I can get you back on track to meet your investment goals through rebalancing and other services.

For information on how to rebalance, see my article on
Rebalancing - Part Two: How To Rebalance Your Portfolio

Matt Haertzen

Matt Haertzen

For more resources on rebalancing, click on the following links:

Rebalance or Rush Hour? by Research Affiliates

Best Practices for Portfolio Rebalancing by Vanguard

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