‘Tis The Season To Rebalance Your Portfolio

‘Tis The Season To Rebalance Your Portfolio
Theodora Lee Joseph, CFA

2 months ago2 mins

2023 has been a bumpy ride, but if you stayed invested despite the ups and downs, you're probably sitting pretty happy. The S&P 500 is up 23% and its cousin bond index notched returns of roughly 8%.

That difference may make stocks look more appealing. Thing is, though, a stock-heavy portfolio would be a very risky one indeed. That’s why the traditional investing playbook advises a mix of 60% stocks for growth and 40% bonds for stability and income. But because stocks usually outshine bonds in the long run, if you forget to rebalance with some anchoring bonds, you could end up with a bigger bulk of risky stocks than you bargained for. So by frequently rebalancing your portfolio, you can avoid going all-in on one type of investment, keeping your money game in line with your goals.

As the chart above shows, if you started with a 60-40 mix in 2002 and left it alone, you'd be looking at 76% stocks and 24% bonds in 2022. And while those stocks do have a chance of pulling in results, they also have a higher risk of dipping – and that's not great if you're eyeing retirement soon.

Ideally, check your portfolio allocation at least once a year and rebalance if it’s shifted five percentage points or more from its target. If you can, do that in tax-friendly accounts like an IRA or 401(k). If that’s not an option, toss in some extra cash on your underweighted asset class or consider lazy-man's investing with “target date funds” – they do all the asset allocation and rebalancing legwork for you. Not only will this steady your risk, but it gives you the chance to sell high-fliers and pick up bargains.

Just remember, rebalancing isn't a magic trick for making money, it's more like a safety net. Markets can stick to certain trends for years, and sometimes, it makes sense to let your winning investments keep their momentum. Still, it's crucial to recognize the power of “reversion to the mean” – even long-running trends eventually wind down. Rebalancing, then, keeps you from being caught off guard when the market does a U-turn.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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