You don’t want to rebalance your portfolio just to do it or because certain stocks or bonds temporarily fall out of favor, which might trigger you to sell out of an investment. Here are a few considerations as you think about rebalancing.

Q: What causes a portfolio to get out of balance from my original asset allocation?

A: Let’s say hypothetically you’ve initially allocated 70% to stock investments and 30% to bond investments. In this example, over time, the stock market’s value could double while the bond market could remain flat. That would lead to the value of your stocks significantly exceeding the value of your bonds, putting your portfolio out of balance. To get your portfolio back in balance, you could sell some stocks and move more money into conservative investments to return to your preferred allocation.

Q: Which factors should influence the need to rebalance my portfolio?

A: When you look at your mix of stocks, bonds and cash, there are two big factors. First, you should consider your risk tolerance. Back to our example, if you were initially allocated 70% to stocks and 30% to bonds, but the portfolio drifts toward a heavier allocation to stocks, you could be taking on more risk than your comfortable with. Rebalancing back to your original 70/30 mix would help bring your portfolio back into alignment with your risk tolerance.

Sometimes you learn that your risk tolerance may not be as high as you previously thought. While you might have thought you were a more aggressive investor, that mindset may have been tested during the precipitous stock market correction in March 2020 due to the pandemic. The reality may be that you discover you are actually a conservative investor, and big market swings keep you up at night.

Risk tolerance is different for everyone. Check in with your wealth advisor who can go through a risk analysis process with you to determine your actual risk tolerance. From there, your advisor can recommend the appropriate mix of investments for you, designed to match your risk tolerance.

The other big factor is your time horizon toward your goals, such as retirement. If you’re retiring in three to five years, it may be time to shift a percentage of your portfolio into bonds and cash investments. Keep in mind, you’ll likely need to maintain a portion allocated to stocks to help keep your portfolio growing over what could be 30 or more years in retirement.

It may be helpful to think of your portfolio in three “buckets.” That means having a portion of the portfolio in a money market, cash or other liquid investments that provides easy access to cash for monthly expenses so you don’t have to sell a stock investment at a potentially inopportune time. The second portion can be in bond investments that have a higher expected return than cash but are still considered to be low risk to help preserve your capital. The third portion is what we’ve already mentioned—stock investments to grow your portfolio. Consult with your wealth advisor on the types of growth investments appropriate for you.

Q: How often should I rebalance my portfolio?

A: There is no rule of thumb for how often you should rebalance, but there is such a thing as doing it too often, which could lead to higher transaction costs and tax bills. To mitigate some of the transaction costs and taxes, you could decide instead to allocate “new” money or future contributions toward investments that help rebalance your portfolio. If you notice your portfolio has become significantly out of balance from your intended investment mix or it’s been a year since you’ve looked at your portfolio, consider sitting down with your advisor.

Reviewing your portfolio and deciding whether to rebalance should be a decision you make with your wealth advisor. Together, you can review your portfolio mix to ensure it still aligns with your risk tolerance and time frame for achieving goals, especially retirement. And, at Mariner, our investment team is in-house and will work alongside your advisor to make recommendations that are suitable for your portfolio.

Source:

“Balancing Your Portfolio: How and When”

This article is limited to the dissemination of general information pertaining to Mariner Wealth Advisors’ investment advisory services and general economic market conditions. The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice or a solicitation to buy or sell any security or engage in a particular investment strategy. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. Any opinions and forecasts contained herein are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon. You should note that the materials are provided “as is” without any express or implied warranties. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision. Asset allocation is a strategy designed to manage risk but it cannot ensure a profit or protect against loss in a declining market. The value of equity securities (stocks) is sensitive to stock market volatility and investing in fixed income securities (bonds) is subject to risks, including, but not limited to, market, interest rate, issuer, credit, inflation, and liquidity risk. 

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