Financial Planning Fridays #4: Rebalancing

Today we will discuss something most people know they should be doing, yet almost no one does on a consistent basis: rebalancing your investment portfolio.

Rebalancing, put simply, is moving your portfolio back to your target investment allocation as the market moves up or down. At Presilium, we start each relationship by building a financial plan that provides a clear path for our clients to reach their goals.

We then use that plan as a guide to decide on an appropriate mix of stocks, bonds, and cash – and then adjust your investments to match this mix. The final step, which is so important, is to consistently adjust your portfolio back to this target allocation as the market moves up or down.

As an example, after discussing your financial plan, we decide together that holding 70% stock and 30% bonds provides the highest likelihood to reach your goals. Immediately, the market goes up significantly and you suddenly hold 80% stock and 20% bonds. At this point, you now hold much more stock than you originally intended, and you face a significant increase in risk.

This is where the importance of rebalancing comes into play. Here, we would sell a portion of the holdings that have gone up in price and are now relatively more expensive to bring your overall mix back to 70% stock and 30% bonds, decreasing your overall risk at the same time.

If you didn’t do this, you would have a portfolio that may be much more volatile than you intended or needed for your plan.

Another example is the opposite side of this. Stocks fall in value, and you now hold 60% in stock and 40% in bonds. You should then add to your stock holdings at the now lower prices to bring your overall allocation back to 70% stock and 30% bonds. Otherwise, your portfolio may be more conservative than you originally intended, which increases the risk to your plan’s overall success in its own right, and you may not get the full benefit when the market begins to move back up again.

At Presilium, we rebalance our client’s accounts every time the market moves up or down 5% from the last time we rebalanced. This allows us to remain very proactive and opportunistic amidst the fast-moving markets often seen during times of volatility, as opposed to a more passive approach like rebalancing quarterly or annually, where you may miss great buying and selling opportunities along the way.

In our next video in this series we will look at another way to measure risk in your investment accounts besides what you may typically read. We can’t wait to share it with you!

Be on the lookout for our next Financial Planning Fridays episode. Subscribe to our Youtube Channel so you never miss an episode. Or contact us directly; schedule your 15-minute call with us today.