Is It Time to Rebalance Your Investment Portfolio?

Rebalance Your Investment Portfolio

By Lori Schock, Director of the SEC’s Office of Investor Education and Advocacy

Is it time to rebalance your investment portfolio? It depends. Many investment professionals recommend rebalancing a portfolio regularly, typically every six to 12 months. If you’re working with an investment professional they can provide suggestions on how best to rebalance your portfolio to continue to meet your financial goals. Rebalancing your portfolio yourself can be complicated, however, there are some investment products that can be helpful. You can also check out our “Beginner’s Guide to Asset Allocation, Diversification and Rebalancing” for some of the basics.

Have Your Goals Changed?

First, take a moment to think about whether your financial goals have changed. Are you still saving to buy a house, paying for your children’s college tuition, or planning on retiring at 65? These kinds of big life decisions should be considered when you’re thinking about whether your current investment portfolio still meets your goals. It’s also a good time to think about whether your risk tolerance or saving and investing time horizon has changed.

Investing Portfolio Percentages As You Age

It goes without saying that the earlier you start planning for retirement, the better off you’ll be. Keep in mind that what your investment portfolio looks like in your 20s almost certainly looks different in your 60s and beyond.

One general rule of creating an investment portfolio has been to gradually reduce your risk as you get older. The thinking is that when you’re younger, you can put more money in riskier investments, like stocks, since you’ll have more time to recover from any losses. Then, as you get older, you would put your money in less risky investments, such as bonds, Certificates of Deposit (CDs) and cash.

For example, in your 20s your investment portfolio may be comprised of 80 percent stocks and 20 percent bonds. However, as your move closer to retirement you may have a more conservative portfolio that may be comprised of 60 percent stocks and 40 percent bonds. And finally, when you’re in retirement and looking to generate some income, you may move to an even more conservative portfolio of 30 to 50 percent in stocks and 50 to 70 percent in bonds.

These are just some examples of different investing strategies that you may want to consider along your investing journey, and ultimately you need to determine which strategy works best for you.

“Set It and Forget It” Strategy

If you don’t want to make rebalancing decisions on your own, you might want to consider investing in target date funds or lifecycle funds. These diversified mutual funds offer a mix of different types of assets designed to make investing for your retirement easier by automatically changing the mix of investments as you age. Generally, the funds are more stock heavy in the beginning shifting to a portfolio mix with more bonds, CDs and cash, and other less risky products as you get closer to your target retirement date. You pick a fund with the right target date based on your investment goals and fund managers make all of the decisions about asset allocation, diversification and rebalancing. It’s a “set it and forget it” type of investment strategy that helps take the guess work out of rebalancing for you.

Should Your Portfolio Change?

During a time of market volatility, it may be especially tempting to make some major investment changes. As you consider making these changes, it’s important to not make any rash decisions. Jumping totally out of the market and trying to time the market may not be the best long-term investment strategy. If you sell all of your stock assets when the market is down, you can lose a significant amount of money. You may also miss out on any financial gains when the market goes back up. Remember, it’s time in the market that counts, not timing the market.

Rather than an “all in or all out” approach, perhaps consider making smaller tweaks to your portfolio. Consider decreasing your stock allocation percentage and increasing the percentages in other areas. Keep in mind that sometimes your allocations can get out of whack when there’s significant growth in one area over another. Rebalancing can help you get back on track.

Diversification is essential to any long-term, successful investment plan. Diversification involves assets within and between asset categories. Decide whether you may be too heavily invested in one particular industry that hasn’t performed as well as you had hoped and consider whether adjustments need to be made. I know it may sound surprising, but you may even determine that it’s in your best interest to decrease your allocation in some money-making investments and increase your allocation in lower performing assets to take advantage of the old adage, “buy low and sell high.” Remember that different asset categories perform differently under various market conditions.

Here’s a simple example of how you may consider rebalancing your investment portfolio. Suppose your initial investment portfolio consists of 80 percent stocks and 20 percent bonds. After a year, due to the changes in the market value of your investments, your investment portfolio now consists of 85 percent stocks and 15 percent bonds. To rebalance your portfolio back to the initial allocation of 80 percent stocks and 20 percent bonds you could consider selling five percent of your stocks and use the proceeds to purchase more bonds.

Whenever you’re considering rebalancing your portfolio, you should also make sure you check to see if there are any fees or tax implications. High transaction fees and large tax penalties may have you rethink whether it’s the right time to make changes.

And with all that said, sometimes leaving your portfolio just the way it is for the time being, is in your best financial interest.

Try Not to Obsess

It’s always a good idea to regularly check on your investment portfolio to see if any rebalancing needs to be done. However, try very hard not to obsess over it or make drastic changes without thoroughly considering your long-term goals.

Note: Director’s Take articles are written in a short, non-legalese format intended to provide you with tips and information on timely investment topics that are important to you. You can subscribe to receive Director’s Take articles or find our latest article on the Director’s Take spotlight page.

This article is provided in the author’s official capacity as the Commission’s Director of the Office of Investor Education and Advocacy but does not necessarily reflect the views of the Commission, the Commissioners, or other members of the staff.