When to Balance Your Portfolio
With the market fluctuations in the past week or so, questions have arisen about when to rebalance your portfolio, if at all. Some say it shouldn’t interfere with your long-term plan and stick to it once a year. Others say the time to rebalance is right after the market rallies or falls by five percent or more .
Whether you invest in funds with a fixed date, use a robotic computer, or an advisor manages your accounts, you don’t need to worry too much about it. This article suggests doing this once a quarter, while this article from Vanguard says results don’t vary much no matter how often you do it (although fees and tax implications vary). As Merrill Lynch explains, one example of when you want to change the balance is the following:
the stock market is doing well and your stocks are going up in value, stocks will make up an increasing percentage of your portfolio. This could put you at greater risk than you originally planned.
Rebalancing your portfolio is about asset allocation or the mix of stocks, bonds, and other asset classes in which you invest your money. As we wrote here , when you are young, you are encouraged to invest the majority of your assets in stocks. As you get older, you can move on to more conservative options, although you don’t need to do this if you are optimistic.
But you don’t have to follow any rules of thumb if you don’t like them. After all, this is your money. And right now is a good time to reevaluate your risk tolerance. If recent stock market fluctuations have made you nauseous or are nearing retirement, you may decide that transferring some of your money into safer investments is the right choice. Conversely, you may decide to invest more in stocks as prices decline. You can take this test from Vanguard to get an idea of your risk tolerance. Tools like Personal Capital and FutureAdvisor will analyze your portfolio for free.
Once you’ve done that, review your current portfolio allocation (you should be able to do this online) to see if it goes where you want it, either based on your new risk tolerance or because hesitation stock market ask it. a little out of order. Then buy and sell the shares to balance them before the appropriate allocation. This usually means “selling just enough of your winning investments and adding that money to your laggards to get your portfolio back to its original allocation or whatever suits you today,” writes Penny Wang for Consumer Reports . Paradoxically, this is true.
You can do this now, on your birthday, or the next day with your personal inventory . The important part is knowing what is comfortable for you and knowing where your money is going.