Just like many things in life, your investment portfolio benefits from regular maintenance. If you take the time to get haircuts, tune up your car, and carry out maintenance on your home, it’s definitely worth spending some time tweaking your investment portfolio too. Rebalancing and reviewing your long-term investment portfolio gives you the opportunity to ensure all of your investments are still right for you and are helping you to reach your financial goals.
Rebalancing your portfolio might take some time, as well as incur a few costs, but it’s worth it to keep your portfolio ticking along and build a strong long-term investing strategy. But what exactly is rebalancing an investment portfolio, and how do you do it?
What does it mean to rebalance your investment portfolio?
Rebalancing and reviewing your investment portfolio is exactly what it sounds like. It means taking a look at your portfolio to see how it’s performing and whether it’s working for you, and making any necessary changes to ensure it’s balanced and works for your goals.
There are various strategies that you might use, depending on your investment goals and your current stage in life. A single person, someone with a young family, and someone just about to retire might all take very different approaches to balance their investment portfolios. Defining your goals is the first step to helping you ensure your portfolio is balanced in the right way.
Why rebalance your portfolio?
Why should you rebalance your portfolio? You probably put it together with certain goals in mind, so making changes might not immediately make much sense to you. However, financial and life goals can change, and your current portfolio might no longer work for you. Additionally, your investments might not all be performing in the way that you want them to. Rebalancing allows you to spread risk, drop investments that aren’t working for you anymore, and look for new investment options that are more suited to your goals.
How often should you rebalance?
There is no hard and fast rule on when or how often you should rebalance your investing portfolio. However, there are some different options that might help you to rebalance your portfolio on a regular basis.
One option is to rebalance on a set schedule, such as once a year. You could also choose to rebalance your portfolio if your target asset allocation gets too far away by a certain percentage. Additionally, it’s useful to rebalance your portfolio if there are any significant changes in your life that could call for it. For example, if you get married, experience a serious illness or disability, have children, get divorced, or even win the lottery, it’s a good idea to take a look at your investing portfolio.
According to a Vanguard study, it doesn’t really matter when or how often you rebalance your portfolio. Whether portfolios in the study were rebalanced monthly, quarterly, or annually, the average returns and volatility remained roughly the same.
Key considerations
There are many things to keep in mind when you are rebalancing your portfolio. Some of these are the same things you might have considered when you first started creating your investment portfolio. If you think about these key considerations, you can ensure you take the right approach to reviewing and rebalancing your portfolio.
Be careful of the costs
Before you make any changes to your portfolio, it’s important to remember that buying and selling assets in your portfolio will often incur costs. However, it’s also possible to rebalance your portfolio at a low cost or even for free if you do it in the right way. You can find brokerage firms that offer trades without fees, and there are plenty of low-cost options that will help you to save money too.
If you prefer to work with a financial advisor, which can help you to make more informed decisions, you can expect that it will come at a cost. While their advice is often well worth the cost, it’s important to factor the expense into your finances. Some types of funds might have higher costs than others, including target-date funds and some mutual funds.
Define your goals
It’s always important to keep your goals in mind if you are rebalancing your portfolio. In fact, a change in goals might be what prompts you to review your portfolio in the first place. Before you start making changes, make sure you have defined your life and financial goals and considered what that means for your portfolio. Maybe you’re aiming to buy a house soon, getting ready to retire, preparing for your first child, or aiming for early retirement.
Balance emotion and practicality
One of the most important things that you need to do when rebalancing your portfolio is to balance your emotions with logic. This is always important when you’re making investment decisions if you want to make the right choices. Of course, it’s difficult to completely remove any emotion from your financial decisions. When you have life goals such as owning a home, raising a family, or having a happy retirement, these factor into how you manage your investments. But the most important thing is that you make the best decisions to help you reach these goals, which requires you to focus on the practicality and risk profile of the investments that you choose.
Reviewing your portfolio
Taking a good look at your portfolio will help you to establish your current position and what you might wish to change. It’s necessary to have an accurate picture of your existing investment portfolio before you start making any changes.
There are a few ways you could review your portfolio and ensure you understand what’s in it. One option is to create a spreadsheet, manually listing each of your accounts and investments, and key details about them. You can then use this information to compare the allocation of your holdings to your target allocations. Another option is to use brokerage software, which is often provided by brokerage firms as a convenient way to see all of your investments in one place. Apps are also useful tools, providing features that allow you to track your investments.
Analyze your portfolio
After you have a clear overview of your portfolio, you can analyze it to see if it’s currently doing what you want it to do. There are several things that you will want to look at to check that your investment portfolio is in the right place.
Start by looking at what percentage of your investments are in different types of assets, including stocks, bonds, cash, or other assets. Compare how this matches up with your target allocation. Next, consider your overall risk. Is the current distribution of your investments and the associated level of risk comfortable for you? Could you reduce your risk or even increase it to help you achieve your goals?
Fees are important to look at too, so take a look at what you’re currently paying in fees. Reducing your fees can save you money so that you can maximize your returns. Make sure you have a full picture of any fees that you’re currently paying.
Of course, you also want to check that your portfolio is delivering the returns that you expect. Are you making enough money from your investments or are you not reaching your goals? However, it’s important to look at the bigger picture and make sure that you focus on your long-term returns. Perhaps you even have to reconsider your goals or your asset allocation to get the returns that you are aiming for.
Catch up with your options
To know what to buy and sell for your portfolio, you should first refresh your knowledge of what’s out there. You might not have looked at your portfolio for a while or even given much thought to your investments. It’s a good idea to see if there are any new products or even new tools that could help you to meet your goals. Maybe there’s a new mutual fund with lower fees or better returns that could be a better fit for your portfolio, for example, or you could swap a mutual fund for an ETF with lower fees.
Choosing what to buy and sell
When it comes to deciding what to buy and sell, first keep in mind the insights that you have gained from analyzing your portfolio and comparing it against your goals. If you hold more stocks than your desired percentage, you might choose to sell some of them and perhaps buy more bonds to balance your portfolio. If you’re not sure exactly which stocks or bonds to sell, start by choosing anything that you don’t understand, with fees that are too high, anything that’s underperforming, or assets with returns that aren’t keeping up with inflation.
Getting financial advice can help you to make the best decisions when you’re rebalancing your investing portfolio. You can get a professional opinion that will help you make the right choices for your financial goals.
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