If you are fairly new to investing you may have already heard a little bit about rebalancing. According to Wikipedia, rebalancing is the action or trading strategy of bringing a portfolio that has deviated away from one’s target asset allocation back into line. But if you’ve looked at your portfolio to find it hasn’t changed all that much yet, you may wonder whether or not you should rebalance your investments?
1. Holding on Too Long
There seems to be some debate among investors and financial advisors alike about how often you should rebalance your investments. Some say once per year and others think rebalancing should be done every couple of months. Regardless, most agree rebalancing your investments from time to time is necessary and beneficial to keeping your portfolio strong. When you do not rebalance, you run the risk of holding onto a fund too long in hopes it will continue to climb. If it drops before you have a chance to sell you could potentially lose a great deal of money due to your hesitation.
2. Waiting Too Long to Buy
In opposition to holding on too long, you may be waiting to buy until the fund drops. Once again, if you wait too long the price may go up rather than down causing you to miss your opportunity for a piece of the pie.
3. Different Growth Rates
Just like the hair on your head, different funds may experience different rates of growth. Because of the differences in growth rates all funds experience, they can change the allocation you originally set up when you first started your investment portfolio. Let’s say you start out with an even split between stocks and bonds in your portfolio and want it to stay that way. The problem is that somewhere around year 15 you could end up with more of a 33%/66% split between bonds and stocks. However, through regular rebalancing you could keep it closer to your target.
4. Reduce Risk
While it isn’t possible to reduce all of the risk associated with investing, you can reduce it significantly through wise investment decisions such as rebalancing. When you have diversified your portfolio to cut back on the risk of losses you probably want it to stay that way. Rebalancing helps achieve that goal. However, you don’t have to do it on your own. You could, for instance, choose to let a robo-advisor do the rebalancing for you.
5. Review Your Portfolio
Another advantage to rebalancing your investments is that is gives you the chance to review your portfolio so you can make any and all changes that are needed. If a fund has risen significantly you may want to take a portion of the profits to buy another high yield fund as well. Or, if you have a fund that is not performing, it gives you the chance to dump it before the losses rack up too much.
If you have been wondering if you should rebalance your investments, it seems the question isn’t really if but when. Don’t hesitate to rebalance once every two or three months to start out with. You can always change the frequency any time you wish.
Do you think you should rebalance your investments? How often would you do it?
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.
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