Portfolio rebalancing is returning your portfolio to the proper mix of stocks, bonds and cash when they no longer conform to your goals.

The primary goal of a rebalancing strategy is to minimize risk relative to a target asset allocation, rather than to maximize returns. A portfolio’s asset allocation is the major determinant of a portfolio’s risk-and-return characteristics. Yet over time, asset classes produce different returns, so the portfolio’s asset allocation changes. Therefore, to recapture the portfolio’s original risk-and-return characteristics, the portfolio should be rebalanced.

There are three strategies that can determine when you should rebalance your portfolio:

  • The “time-only” strategy means rebalancing on a set time schedule such as monthly, quarterly, or annually.
  • The “threshold-only” strategy involves rebalancing when your portfolio deviates from its target asset allocation by a predetermined percentage (5% for example).
  • The “time-and-threshold” strategy combines both options by monitoring the portfolio on a set time schedule, but rebalancing only if the allocation deviates from the target by a predetermined minimum rebalancing threshold.

Portfolio rebalancing is an important part of an effective investment strategy.

It is often tempting to leave the portfolio allocations alone. However, the purpose of establishing allocations is to attempt to achieve the best return with an acceptable level of risk. Many investors that have done a mid-year portfolio review might find that the domestic equity holdings have grown past their target allocations. Consider reviewing your portfolio at least once a year in terms of rebalancing or more frequently if you have had a significant gain or loss in any asset classes.

We generally recommend when your assets drift 5% or more away from your target allocations, you should rebalance. This could occur naturally or over time following an abrupt rise or decline in one or more asset classes. Talk with your financial adviser when you establish your portfolio and determine what rebalancing strategy to use to meet your goals and objectives.

SVA Plumb Financial helps our clients with their portfolio rebalancing strategy. Contact us to learn how we can help you with your personal investment strategies.