At 83rd Street, we like to think of a diversified portfolio like a pie. Each investment category represents a slice. The size of each slice is determined by your advisor based on questions you have answered over the years about risk tolerance, investment goals, and liquidity needs. As time passes, each pie slice grows unevenly. Here are some hypothetical performances of some indexes (pie slices).
- Emerging Markets 17.2%
- Large Cap 8.7%
- Small Cap 9.8%
- Government Bonds 0.4%
Not all pieces grew at the same rate. They never do. Rebalancing is the act of selling pieces of the pie that have outgrown their desired sizes and investing the proceeds in the slice(s) that have shrunk. Some people use the phrase, “buy low, sell high” to describe this process.
The Dangers of Allowing Your Portfolio to Become Unevenly Balanced
I talked to a friend recently who set up his own investments to be a 60/40 stock-to-bond split during his retirement in 2009. He’s been talking about rebalancing for years but didn’t want to for fear of capital gains tax, and rising interest rates. Now at age 75, his account has grown to be too risky. His stocks are up over 250% and his bonds really haven’t moved much. He’s been living on the dividends and income, so he didn’t reinvest those either. The result is a 75-year-old man with an 80% stock portfolio! Over that same period, it would have been appropriate for him to adjust his portfolio from 60% stock to 40%-50% stock.
How Often Should You Rebalance Your Portfolio?
In our model portfolios, we typically rebalance investor accounts 2-4 times per year depending on market moves which have tended to be drawn-out, extended moves. Some years are much more volatile. In those years we may rebalance 5-6 times expecting that the repositioning help with long-term performance.
Take Control of Your Investment Strategy with Rebalancing
If you haven’t rebalanced your portfolio, get in touch with our team. We’re happy to take a look and offer our help.