Why We Rebalance
Jerry Davidse explains portfolio rebalancing, the practice of adjusting investments back to a target mix of stocks, bonds, and cash after market moves cause them to drift. He describes how rebalancing creates a disciplined process for selling what has grown and adding to what has declined, keeping a portfolio aligned with an investor's financial plan.
Jerry Davidse explains portfolio rebalancing, the practice of adjusting investments back to a target mix of stocks, bonds, and cash after market moves cause them to drift. He describes how rebalancing creates a disciplined process for selling what has grown and adding to what has declined, keeping a portfolio aligned with an investor's financial plan.
Key takeaways
- Rebalancing adjusts a portfolio back to its intended mix of stocks, bonds, and cash after market moves cause it to drift.
- A strong stock market can quietly shift a portfolio toward more risk than originally intended, which rebalancing corrects.
- Rebalancing creates a disciplined process for selling assets that have grown and adding to those that have declined, rather than chasing recent performance.
- Target allocation should reflect an investor's financial plan, time horizon, income needs, and comfort with risk.
Hi friends. Today I want to discuss one of the most valuable habits for long-term investors: regularly rebalancing your investment portfolio. Rebalancing simply means adjusting your investments back to their intended mix of stocks, bonds, and cash.
Why is this so important? First, rebalancing helps keep the amount of risk in your portfolio aligned with your financial plan. Imagine that your target allocation is 70% stocks and 30% bonds. After a strong period in the stock market, your portfolio might shift to 80% stocks and 20% bonds because of those gains. Although that growth may feel like good news, you are now taking more risk than you originally intended. Rebalancing brings your portfolio back to its target by selling a portion of the investments that have grown and reallocating the proceeds elsewhere.
The opposite can happen when stocks decline. Your portfolio might shift to 60% stocks and 40% bonds. Rebalancing would involve adding to stocks at lower prices, returning your portfolio to its intended allocation, and positioning you to participate more fully in a future recovery.
This highlights another benefit of rebalancing. It creates a disciplined process for buying lower and selling higher. Without that discipline, emotions can take over. Investors are often tempted to buy more of whatever has recently performed well, and avoid investments that have declined. Rebalancing encourages the opposite behavior. It can also help you stay focused on your long-term goals. Instead of reacting to headlines, market forecasts, or short-term volatility, you have a disciplined strategy to rely on.
Your target allocation should be based on your financial plan, time horizon, income needs, and comfort with risk. At Presilium, we begin with a financial plan, use that to build a custom investment model, and then use a disciplined process to rebalance our client portfolios as the market moves up and down. The purpose is not to predict what the market will do next. It is to keep your investments aligned with the strategy designed to help you reach your goals.
A portfolio can drift surprisingly far over time. Rebalancing helps keep your risk, your investments, and your financial plan moving in the same direction towards reaching your goals. Thank you, and I look forward to talking with you next Friday morning.
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