It’s the idea of keeping your investment portfolio aligned with your original plan. It’s an important way to stick with your investing style and original objectives.

Let’s say that you have part of your assets invested in the stock market. And over a period, stocks do really well. Eventually, too much of your retirement account balance might be made up of stocks, which doesn’t align with your goals. Or your investing style.

Why is rebalancing important?

Because it can:
  • Give you the opportunity to take a new look at all the investment options in your portfolio
  • Force you to take profits from the investment options which have run up and put money in those that may have merit but haven’t gone up
  • Smooth investment returns
In the example below, we’re assuming your retirement portfolio is made up of:
  • 60% stocks
  • 40% bonds
Let’s say five years later you haven’t rebalanced. And during that time, the stock market has outperformed the bond market. So, now your portfolio is made up of:
  • 85% stocks
  • 15% bonds
This puts you at a potentially greater risk of loss than you originally wanted. Rebalancing on a regular basis puts you back in line with your 60/40 split.
Color key for the following charts about rebalancing
Pie chart of a rebalanced portfolio. The chart is split into 60% Equity Funds and 40% Bond Funds.
Pie chart of a non-rebalanced portfolio, where the percentages are out of balance from the original percentages of 60% Equity Fund and 40% Bond Funds. The chart is split into 85% Equity Funds and 15% Bond Funds.

Investing involves risk. You could lose money. And there is no guarantee that investment objectives will be achieved.

Asset allocation, rebalancing and diversification do not assure a profit or protect against loss in a down market.