What is Portfolio Rebalancing?

Schedule a Complimentary Financial Review

Investments can be risky since markets constantly fluctuate, but strategies are available to help you maintain a well-balanced portfolio. For example, you can shift money between asset classes to reflect market changes and work with your financial adviser to create a diversified strategy. This can help bring you closer to your financial goals while also mitigating potential risks along the way.

About Rebalancing Investments

When people buy and sell sections of their portfolio to maintain a consistent asset allocation, they are rebalancing their investments. Individuals may also readjust their portfolios if their risk level changes and they need to develop a new asset allocation strategy.

Portfolio rebalancing is necessary because the market can affect individual investments differently. For example, stocks are typically riskier but can yield higher returns, while bonds are considered safer but provide fixed income. If your stocks do well during a market period, they may take up more of your portfolio than other investments. While readjusting cannot guarantee optimal performance, it may ensure your portfolio stays on track in the long run.

How to Rebalance your Portfolio

Various factors can affect how you rebalance your portfolio, including the types of investments made and your current or future lifestyle needs. However, the general focus should be retaining stability. When readjusting your portfolio, consider the following strategies that can help guide the process:

Keep Track of Your Assets

Once you establish a rebalancing plan, start recording and categorizing each new investment you buy. This step will provide a coherent overview of how much money you have in each asset type, making it easier to rebalance your portfolio at every level.

Consider Your Age

If you are unsure how to readjust your investments, take your age and subtract it by 100. The resulting number expresses how much equity you should have at different periods in your life. Typically, younger people look toward gaining more equity, and older individuals strive to gain more fixed income. It’s important to remember that each situation is unique. Personal investment goals and risk tolerance can inform your rebalancing strategy as well as your age.

Compare Portfolio Changes

Part of rebalancing involves comparing the asset weightings in your initial investments and current portfolio. To measure these weightings, divide each asset class value by the total portfolio worth. Then, evaluate this amount against the value of the original weightings. This strategy can provide insight into changes that may impact your financial goals.

Mitigate Risk

When you review your portfolio, you may notice that your current asset weightings have increased your risk level. To readjust your investments, multiply the value of the entire portfolio by the percentages of each asset group. Your answer is the amount of money you should invest in each asset class to preserve the initial allocation.

Take Caution when Selling

Selling investments to rebalance a portfolio may result in added capital gains taxes. To avoid paying more in taxes, some individuals choose to put more money into underweighted asset sections and less in overweighed classes.

When to Rebalance

Typically, portfolio rebalancing is done at predetermined periods throughout the year to ensure the investments support long-term goals. This strategy allows individuals to catch significant changes in their investments without constantly monitoring small fluctuations. There are several approaches you can take when rebalancing investments, including:

  • Calendar rebalancing: This simple method helps you evaluate your portfolio at a set interval and make modifications at a specific frequency. It is an efficient and cost-effective way to readjust investments but may be inconvenient if the market changes during an off period.
  • Constant-mix strategy: Each security in a portfolio has a distinct composition, also known as a band. You can readjust the entire portfolio if a single asset moves outside its allowable band with the constant-mix strategy. This approach helps your portfolio return to its original allocation rapidly.
  • Constant proportion portfolio insurance (CPPI): In CPPI, investors design their asset allocation around a base value of their portfolios. The base amount is determined by subtracting some floor value from the current portfolio worth and multiplying a coefficient.

Rebalance Your Portfolio with a Professional

The importance of rebalancing a portfolio cannot be overstated, especially for those with a wide variety of investments. If you need assistance with the rebalancing process, turn to Park Place Financial for personalized investment planning services. Our certified financial planners can examine your portfolio and help ensure it supports both short- and long-term financial goals. Receive a complimentary financial checkup or contact us today to discuss rebalancing with one of our advisors.


The 3 Pillars of Successful
Retirement Plans

    Sign-Up for your Complimentary Financial Review