In last month’s column, we talked about strategies for rebalancing investment portfolios. This month, let’s address the next question you may ask: How often should I rebalance, if at all, and under what circumstances?
Remember our theme? Because markets are more dynamic now than they have been in the past, rebalancing your portfolio—both asset classes and individual securities—is now more important than before.
Your life is dynamic, too. Think of the person you were 10 years ago: Your family situation, your income, and your financial priorities have probably all changed. Accounting for those differences is the real heart and soul of financial planning.
Let’s start with the assumption that most portfolios consist of a mix of stocks (both domestic and international), bonds, and cash. Most investment advisors approach rebalancing in one of three ways: the “do nothing” buy-and-hold strategy; the constant-mix strategy of buying more stock when prices fall and selling stock when prices rise to maintain the same percentage of your portfolio in stocks regardless of whether the market is rising or falling; and the constant-proportion portfolio-insurance strategy of selling stock when prices drop and buying stock when prices rise, in addition to establishing a “cushion” of allowable losses to maintain a “floor” value beneath which the portfolio must not fall.
Each strategy works differently in various market conditions. Buy-and-hold and constant-proportion strategies work better in markets that steadily move upward, and the constant-mix strategy tends to work better in an oscillating market.
A Simple Approach
Knowing when to employ a certain rebalancing strategy is different than knowing when to rebalance, though. For that, you can rely on one basic approach: Look at your portfolio and review your asset allocations at least once a year.
That’s an arbitrary interval, but it’s meant to apply a level of discipline to the process. Looking at the asset mix of your portfolio and determining how it is being affected by the changing markets helps you keep your portfolio in line with your goals.
Does that mean that you must rebalance each and every year? Absolutely not. It simply dictates the level of attention you should give to this activity.
Indeed, sometimes rebalancing should take place more often.
The idea is to keep your finger on the pulse of your life, and how your changing life circumstances can relate to your finances. Ask yourself two basic questions:
What’s the purpose of the portfolio?
Is the portfolio appropriate for me at this particular stage in life?
If you’re 45 and you have three kids headed for college, your portfolio should look different from that of someone who’s 65 and anticipating 20 years of retirement.
Stay Up-to-Date
The person you are now isn’t the same person you were even five years ago. Be good to yourself and recognize that. It’s surprising how many people don’t do that for themselves.
Money is for living, to satisfy your needs and the needs of those you leave behind when you are gone. Stay in touch with these rebalancing principles, and you’ll be just fine.
