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%.