Rebalancing

Putting the Balance Back Into Your Portfolio

Your investment strategy is probably designed for the long term with a diversified mix of various types of investments. However, there are times to consider tweaking your portfolio to react to changes that could – or should – alter your investment strategy.

It may be time to review your portfolio and consider rebalancing your investment mix if, for instance:

  • Your risk tolerance changes.
  • You reach a financial goal, such as helping a child pay for college.
  • You are close to retiring.

When your investment goals, time horizon and tolerance for risk changes, you can rebalance your portfolio to restore the asset allocation you want. Keep in mind that the use of asset allocation doesn’t guarantee returns or insulate you from potential losses.

Understanding how rebalancing works

Say the stock market gains over the past three years have swollen the stocks portion of your portfolio. If the current level is too high for your risk tolerance, you can return to your original allocation.

How do you do this?

  • You can move money from stocks into other asset classes, such as bond and money market funds.
  • Or you can invest more in underrepresented asset classes until you achieve the overall allocations you want.

Learn about rebalancing through this example

By using a hypothetical subject – Karen – let’s examine how she rebalances her portfolio. Three years after Karen invested her money in three different asset classes, gains in the stock market increased the value of her stock funds 22%. During the same period, the value of her bond funds grew 9% and her money market fund value was up 4%.

Original Mix

Current Mix
(3 years later)

Rebalanced Mix

$55,000 Portfolio

$63,828 Portfolio

$63,828 Portfolio

Stocks

60%
($33,000)

63.1%
($40,275)

60%
($38,297)

Bonds

25%
($13,750)

23.5%
($15,000)

25%
($15,957)

Money Market

15%
($8,250)

13.4%
($8,553)

15%
($9,574)

At the end of three years, the percentage of stocks in Karen’s portfolio went from 60% to 63.1%. She wasn’t comfortable with a level of investment risk that high, so she decided to return her asset allocation to the original percentages.

She did it by selling shares in her stock funds and buying additional shares in bond and money market funds.1

The information in this chart is hypothetical and used for illustration purposes only. It is not intended to predict the actual performance of any particular investment. The effect of taxes and the costs of investing have not been reflected.

Some investments offer automatic rebalancing

Depending on the type of investment, rebalancing can be regular and automatic. For example, funds known as asset allocation funds split their investment assets among stocks, bonds and cash. Rebalancing becomes automatic in order to stay within the portfolio’s objectives and risk parameters.