Life is full of big decisions – choosing a home, buying a car, choosing financial accounts that will meet your needs and help create a secure future for you and your family.
These big-ticket purchases require regular care and attention so that you can make the most of them. Regular spring cleaning like power-washing your home’s exterior, checking your car’s oil, and rebalancing your financial portfolio can go a long way in protecting your investments.
3 Tips When Rebalancing Your Portfolio
Check Your Portfolio Regularly
You create a target mix of your portfolio based on your goals, time frame and risk tolerance. But goals can change and market volatility can cause changes in your asset allocation, so it’s important to monitor your portfolio regularly and make adjustments as needed.
Did you know that the risk level of your portfolio can change even if you have not changed any of your investments? See here how it works. Over time, your allocation will begin to move away from your target mix in favor of better-performing, often riskier assets. As a result, you may find that you overweight In stocks, for example, exposing you to more risk than you’re comfortable with.
Let’s say you have a portfolio of 70% stocks and 30% bonds and you have decided to rebalance when your allocation falls by 5 percentage points or more from the target. During your annual review, you see that your portfolio has changed to 76% stocks and 24% bonds. Now is the time to make some adjustments to stay on track with your risk and return objectives. You can either rebalance your portfolio to a 70/30 mix or set a new one if your goals or circumstances have changed and you become more or less conservative.
- Stay focused on your long-term goals. Making short-term changes to your portfolio in response to volatile markets usually has a small impact on your ability to achieve your goals.
- Limit how often you rebalance. Very often rebalancing can come at the cost of lower returns and a heavy tax burden.
- Use one of these rebalancing strategies:
- Timings: Rebalance your portfolio on a predetermined schedule such as quarterly, half-yearly or annually (not daily or weekly).
- Threshold: Rebalance your portfolio only when its asset allocation falls below a predetermined percentage of its target.
- Time and range: Combine both the strategies to further balance your risk.
Not sure when to rebalance your portfolio?
We recommend checking your asset allocation every 6 months and making adjustments if it moves 5 percentage points or more from its target.
However, if it doesn’t work with your schedule, don’t stress about the specifics. According to our research, there is no one rebalancing strategy that consistently outperforms another. * The important thing is to choose a schedule that is easy to follow, set a reminder on your calendar, and stick to it.
Reduce transaction fees and taxes
When it’s time to rebalance your portfolio, consider these tax-efficient best practices to potentially further improve your investment performance without sacrificing your risk/return profile.
|best practice||how it works|
|Focus on tax-advantaged accounts||Getting the sale price of an investment out of a taxable account will most likely mean you have to pay tax on the actual gain. To avoid this, you can rebalance only in your tax-advantaged accounts.|
|Rebalancing with Portfolio Cash Flow||Direct cash flows such as dividends and interest into the less weighted asset classes of your portfolio. And when you take money out of your portfolio, start with your overweight asset class.
think thought: If you are 72 years of age or older, take your required minimum distributions (RMDs) from your retirement account(s) when rebalancing your portfolio. You can then reinvest your RMDs into one of your taxable accounts, which has a lower weighted asset class.
|keep track of expenses||To reduce transaction costs and taxes, you can choose partially Rebalance your portfolio to its target asset allocation. Focusing primarily on stocks with a high cost basis (in taxable accounts) or asset classes that are highly overweight or underweight will limit both the taxes and transaction costs associated with rebalancing.|
Manage risk and emotion
It is every investor’s dream to buy low and sell high. But the purpose of rebalancing is to manage risk, not maximize returns. Rebalancing is not about market-timing; it’s about sticking Vanguard’s Principles for Investing Success and strategize to align with your long-term goals.
So what does this mean for you?
Since bull and bear markets do not last forever, it is important to distance yourself from difficult decisions by sticking to a fixed rebalancing strategy. This is a great way to take your emotions out of investing, keep your allocations under control, and limit the high taxes associated with frequent rebalancing.
Ready to put a rebalancing strategy into action?
find a variety of do it yourself resources To boost your rebalancing knowledge and help you determine a plan that works for you.
* Pawn, Getting Back on Track: A Guide to Smart Rebalancing (Jenna L. McNamee, Thomas Paradise, & Maria A. Bruno, CFP®, 2019).
All investments are subject to risk, including the potential loss of the money you have invested.
We recommend that you consult with a tax or financial advisor about your personal situation.
Advice services are provided by Vanguard Advisors, Inc., a registered investment advisor, or Vanguard National Trust Company, a federally chartered, limited-purpose trust company.
The services provided to clients who elect to receive ongoing advice will vary depending on the amount of assets in the portfolio. Review Form CRS and Vanguard Personal Advisor Services Brochure For important details about the service, including its asset-based service level and fee breakpoints.
“3 Rebalancing Tips for Healing Your Portfolio”handjob