The portfolio balancing act

At 2017’s end, the S&P 500 index returned more than 19 percent. The NASDAQ fared even better with a 28 percent return. Both are well above their average returns from the past five years.

Keeping up with your investment portfolio’s performance in the stock market, however, is more than just tracking the returns. It’s a smart time to consider rebalancing your investment mix to regain the asset allocation you set when you first designed your portfolio.

Start with asset allocation

Asset allocation is a common strategy for setting up an investment portfolio. It involves focusing on broad categories of investments (assets) and proportioning them to match your financial goals, the amount of time you have to invest, and your risk tolerance. Whether you have one retirement account or multiple investment accounts, your investments are likely allocated through different asset types.

The combination of investments you choose is as important as the individual investments. Each has strengths and weaknesses that play a specific role in your overall investing strategy. Some investments, like stocks, may be chosen for their growth potential. Other assets, such as bonds, may provide regular income. First, take a look at your asset allocation and decide if it still aligns with your financial goals.

Then consider rebalancing

Even if you’ve chosen an appropriate asset allocation, market forces can quickly alter it. If stock prices climb like they did in 2017, you could find yourself with a greater percentage of stocks in your portfolio than you want.

To bring your portfolio back to its original allocation, you’ll need to do something that may feel counterintuitive: sell some of what’s performing well and use that money to buy investments in other asset classes that now represent less of your portfolio. Typically, you’d buy and sell enough to realign your percentages.

When should you do it? A common rule of thumb is to rebalance your portfolio whenever one type of investment gets out of line by a certain percentage, like 5 to 10 percent. You could also set a regular date, like tax time or the end of the year. This differs from person to person. A long-term investor might allow their portfolio to drift further away from their original allocation, whereas a retiree might rebalance more frequently, even monthly.

All investments generally fluctuate in value from time to time. To stick to a rebalancing strategy, you have to be comfortable with the cyclical nature of investing. One way to do that is determine if your investment account will automatically rebalance based on certain parameters. You won’t have to remember each year or worry you’ll be too nervous to make a decision.

Even if your portfolio is concentrated in one asset type, you can still rebalance with individual stocks or mutual funds. A word of caution: consider rebalancing’s transaction costs and tax consequences. For example, selling investments as part of your rebalancing strategy might trigger capital gains tax or redemption fees. If you’re rebalancing a retirement account that gives you a tax advantage, this shouldn’t apply to you. Rebalancing is about being comfortable with the risk while assuring your portfolio’s long-term health no matter a market’s peaks and valleys.

Our investment professionals are ready to assist you with any questions you might have about rebalancing. Give us a call today at 740.349.3900 or visit us anytime.

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