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6 Things to Know When Rebalancing a Portfolio

You put a lot of time, energy, and research into how you wanted to invest your money, but are you rebalancing a portfolio? If you’re young and starting out, you probably took a few more risks. When you see the finish line to retirement ahead, you selected investments that are more reliable and less risky. However, it isn’t enough to just invest your funds and let them do their thing, it’s important you are rebalancing your investment portfolio.

You need to check up on them every once in a while to see how your ​portfolio is performing​. It’s also a good idea to ensure that your investment strategy remains intact. For instance, when you opened your portfolio and choose your investments, your goal was to have 45 percent in bonds, 40 percent in equity funds, and 15 percent in treasury funds. After some time, these percentages may change based on how well your bonds, equity funds, and treasury funds are doing on the market. This is why rebalancing your investment portfolio is essential.

1. What does Rebalancing a Portfolio mean?

Rebalancing is actions you take to return your portfolio back to its original percentages — 45 percent in bonds, 40 percent in equity funds, and 15 percent in treasury funds. To do this, you may need to sell some of your investments and buy others to restore the weighted percentages. Of course, you may choose to leave things as they are if the market seems stable.

In some cases, your willingness to take risks may have changed. You could be more willing or less willing to take big risks for big rewards, or you may want steady growth that you can count on. During the ​rebalancing process​, you can make changes to the weights of each area of investment to reflect your current needs.

2. How Did Your Investment Portfolio Get Out of Balance?

You carefully picked all of your investments and kept them within the percentage balance, so how’d they get out of balance. In most cases, different types of investments perform at different rates. For instance, your bonds may have done really well and earned an excellent profit while your treasury funds stay where they were at, and your equity funds lost a little money.

Now, your percentages look more like this: 55 percent in bonds, 15 percent in treasury funds, and 30 percent in equity funds. You’ll need to sell 10 percent of your bonds and buy an additional 10 percent in equity funds to restore your original balance.

Financial advisors working on rebalancing portfolio

3. How Often Do You Need to Rebalance Your Investment Portfolio?

It’s a delicate balance deciding how often to rebalance your investment portfolio. If you do it too often, you may become spooked by the subtle fluctuations of the markets that don’t really reflect the earnings over a longer period of time. You may decide to sell specific investments and lose out on long-term earnings.

You can choose to ​rebalance your investment portfolio​ based on a time period or a percentage. With the time period, you might decide to check your investment portfolio and rebalance it as necessary every year or every six months, while the percentage option would see you rebalancing a portfolio when one area changes by a certain percentage, such as five percent. Most investment professionals recommend the percentage change option, so you aren’t reviewing the account too often.

4. Why Do You Need to Rebalance Your Investment Portfolio?

Rebalancing a portfolio is necessary to minimize risk to your account. For the most part, the areas that will see the highest growth is going to be the more risky option, such as the stock market or emerging markets. You want these sections to stay in balance because if the market suddenly drops you don’t want to lose a higher percentage.

For example, when you started your portfolio, it was 50 percent stocks and 50 percent treasury bonds. Treasury bonds are pretty secure while the stock market can be volatile. For the first year, your stocks do really well, and it becomes 60 percent of your portfolio.

By year five, stocks are 80 percent of your portfolio. Now, the original funds were $100,000, and you still have $50,000 plus any interest in your treasury bonds investment. However, you now have more than $200,000 in the stock market, so you have a lot more money at risk. If you’d been rebalancing a portfolio all along, you’d have closer to a $125,000 in the more secure treasury bonds.

5. Rebalancing Your Retirement Portfolio

One investment portfolio that you need to rebalance routinely is your ​retirement account​. This is the money that will see you through your retirement years when Social Security isn’t enough. Many young investors want to invest aggressively in this type of account. They have time to build up funds and can take more risks. Older investors tend

to choose a portfolio that shows steady and reliable growth. You can rebalance these accounts to meet your current needs and make them less risky as you age.

6. Consider Diversification When Rebalancing

When rebalancing a portfolio, you don’t want to take on too much risk in one area. This doesn’t necessarily mean that one investment is riskier than the other. It means that such a large percentage of your portfolio is tied to a single investment. If something happens to that investment, then you can lose a lot of your funds.

For example, say you opened your portfolio and spent half the money on Apple stock and the other half on Home Depot stock. Over the last year, Apple has done really well. Now, your weighted portfolio is 75 percent Apple and 25 percent Home Depot. If anything happens to the Apple stock, you stand to lose more money, then if something happens to the Home Depot stock. In this case, it’s a good idea to sell the extra 25 percent of the stock and buy more Home Depot shares or some other company to minimize your risks.

At Bogart Wealth, we understand the importance of your investment portfolio and striking the right balance between risk and stability based on your personal needs. Whether it’s time to rebalance your existing investment portfolio or start a portfolio, we’re ready to partner with you to make a better, more financially secure future.Contact us today​ to schedule an appointment.

IMPORTANT DISCLOSURE INFORMATION:
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bogart Wealth, LLC [“Bogart Wealth”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level (s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bogart Wealth. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Bogart Wealth is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bogart Wealth’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at bogartwealth.com


Please Note: Bogart Wealth does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bogart Wealth’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.
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