Think of rebalancing as conducting routine maintenance on your portfolio, just like a tune up for your car. Over the course of the year, the market value of each security within your portfolio earns a different return, resulting in a different portfolio allocation than when you started the year. Rebalancing is the act of bringing the allocations back to what you originally set out. It often requires selling investments that have experienced a gain and buying investments that did not perform as well. Now, it can be hard to convince yourself to sell the "winners", but doing so reflects one of the basic principles of investing wisdom: "buy low, sell high." The primary goal of rebalancing is to manage risk: it helps keep your portfolio mix in sync with your tolerance for risk.

  

Why should I rebalance?

Let's use a simple example of owning 60% stocks and 40% bonds in your portfolio. If stocks rise 10% and bonds rise only 2.5% over the year, your portfolio will be misaligned from where you began, because it will now consist of 62% in stocks and 38% in bonds. To bring your portfolio back in line with your investment target, you should sell 2% of your stocks and buy 2% more in bonds.*

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Now let's use an example from the present for that same 60/40 portfolio, using the S&P 500 total return index for U.S. stocks and the Barclays Aggregate bonds index for core U.S. bonds, respectively. Let's say the  last time you decided to rebalance this portfolio was during the bear market in January 2009. Since then, the relative performance of these investments has caused some big changes to the portfolio mix you initially selected. The hypothetical portfolio depicted in the pie chart shows how U.S. stocks went from 60% of the portfolio in January 2009 to 79% at the end of December 2017, while the proportion of U.S. bonds went from 40% to 21% during the same time.

The equity allocation increased nearly 32% during the period from January 2009 through December 2017, which is not uncommon to see after extended periods of investing during bull markets. Rebalancing may also prevent being overweight stocks or bonds at or near market tops. While there is nothing wrong with having more stocks in a portfolio, that decision should be a result of your planning process and not driven entirely by the markets. The challenge for investors is that more stocks come with more risk, and adding risk to a portfolio may cause investors to derail from the course they originally set out on.

How should I rebalance?

Rather than letting market movements dictate your investment mix, it may make more sense to rebalance your holdings periodically or when your portfolios shift a set amount from your target. Rebalancing annually or semi-annually, or setting a threshold of 5%-10% deviation from the target mix, are typically considered valuable investing practices. The frequency of rebalancing and the target mix can be tailored to your needs, making it easier to stick to a plan. It's also important to put aside short-term market forecasts when rebalancing your portfolio. Otherwise, you may find yourself tempted to time the market - or afraid to take any action at all - because you are waiting for something to happen over which you have no control.

Bottom Line

Given the uncertainty in today's markets, this is an opportune time to review the allocation you originally set out. Investing certainly requires patience for the long term, and a disciplined approach can help create value beyond the cyclical trends of the market. Like tuning up your car for that beautiful spring ride, mitigating some of the risks in your investment portfolio during a bull market is a good practice to help you stay aligned with your goals.

*It's important to note that rebalancing does not ensure a profit or protect against loss in declining markets. Additionally, investors should be aware that there may be costs associated with rebalancing, such as commissions, purchase and redemption fees.

This material is for informational purposes only and sets forth the views and opinions of our investment managers as of this date. The comments, opinions and estimates are based on or derived from publicly available information from sources that we believe to be reliable. This commentary is not intended as investment advice or an investment recommendation nor should it be construed as a solicitation to buy or sell securities. All indexes are unmanaged, and an individual cannot invest directly in an index. Index returns do not include fees or expenses. Past performance is no indication of future performance. The Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ.

This Thought of The Week has been prepared by and for Global Financial Private Capital, LLC ("GFPC"). GFPC owns all copyright rights in and to this and each of its Thought For The Week articles. It is impermissible to copy or redistribute GFPC's Thought For The Week articles without our prior approval.

Investment advisory services offered through Global Financial Private Capital, LLC. Securities offered through GF Investment Services, LLC. Member FINRA/SIPC. 501 North Cattlemen Road, Ste. 106, Sarasota, FL 34232

 

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Make it a Great Week!   Enjoy His gift of today!

 

Investment advisory services offered through Global Financial Private Capital, LLC, an SEC Registered Investment Adviser. SEC registration does not imply any level of skill or training. Past performance is not indicative of future results. This commentary is not intended as investment advice or an investment recommendation it is solely the opinion of our investment managers at the time of writing. Nothing in this commentary should be considered as a solicitation to buy or sell securities. Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company, and are not offered through Global Financial Private Capital. 

 

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AssetLock® is tracking software used to monitor the performance of a client's portfolio, and to predetermine the amount of downside the client is willing to tolerate.  It is NOT an actual stop order and will NOT automatically sell the individual securities in the portfolio.  Therefore, the AssetLock® value is a reference point to encourage a conversation between the advisor/firm and the client to determine if the client's portfolio should remain unchanged, reset the AssetLock® percentage by reallocating to a different risk profile, liquidate part or all of their portfolio or opt out of AssetLock®.