Collin Randall

When markets move, so does your portfolio. Over time, even a well-built investment mix can drift out of alignment. While most investors know that diversification is a prudent aspect of a portfolio, they often don’t monitor the movement in their portfolio and adjust appropriately as that diversification changes.

For example, suppose your plan calls for 60% in stocks and 40% in bonds. After a strong year for the stock market, your portfolio might now be 70% stocks and 30% bonds. That extra 10% in stocks means you’re taking on more risk than you originally intended — whether you realize it or not.

Rebalancing would involve trimming some of the stock positions and reallocating to bonds, bringing your portfolio back to your desired balance. Rebalancing can also take place within an asset class. For instance, reallocating among different sectors of the equity markets.

Without rebalancing, a portfolio can become overweight within riskier assets during bull markets, leaving investors exposed to more risk than they intended.

Rebalancing forces you to be disciplined. By its nature, this also helps you “buy low and sell high” by selling what has gone up and buying what has lagged. When implemented regularly, this allows for a structured, unemotional process that helps keep risk in check.

Consider the market drop in 2020 coinciding with COVID-19 where the S&P 500 dropped over 30% in a matter of weeks. In that time frame, bonds dramatically outperformed stocks. If you had a portfolio of stocks and bonds and were rebalancing to get your risk aligned, you would have been selling bonds to purchase stocks at a time when the value of stocks was lower.

There is no one-size-fits-all rule for how often to rebalance. It may be a couple of times a year, or when a target allocation drifts by a certain percentage (say 5%). The key is to make it systematic, not emotional. Your adviser can help you determine a schedule and strategy that balances discipline with tax efficiency, especially in taxable accounts.

If you haven’t reviewed your allocation lately, it may be time for a “portfolio checkup.” Like a good tuneup for your car, rebalancing ensures you’re ready for the road ahead.

Collin Randall, CFA, CFP, is a financial adviser at Randall & Associates Wealth Management, with offices in Butler and Warrendale. Randall & Associates is a registered investment adviser and does not provide legal, accounting or tax advice. This material is the opinion of the author and for informational purposes.