When To Rebalance Your Portfolio

With the market fluctuations the past week or so, there have been questions about when to rebalance your portfolio, if at all. Some say it shouldn't interfere with your long-term plan, and to stick to once a year. Others say the time to rebalance is right after the market goes up or down by five per cent or more.

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If you're invested in target-date funds, you use a robo, or an adviser manages your accounts, you don't need to worry about it too much. This article argues for doing it once a quarter, while this paper from Vanguard says the results don't vary that much, no matter how often you do it (though the fees and tax implications do). As Merrill Lynch explains, one example of when you'd want to rebalance is when:

the stock market is doing well and the stocks you own increase in value, stocks will come to represent an ever-larger percentage of your portfolio. This could expose you to more risk than you originally intended.

Rebalancing your portfolio is all about the asset allocation, or the mix of stocks, bonds and other asset classes that you invest your money in. When you're young you're encouraged to put most of your assets into equities. As you get older, you can shift into more conservative options, though you don't have to if you're feeling bullish.

But you don't have to follow any of the rules of thumb if you're not comfortable with them. It's your money, after all. And right now is a good time to reassess your risk tolerance. If the stock market's recent swings made you queasy, or you're nearing retirement, you may decide that moving some of your money into safer investments is the right choice for you. Conversely, you may decide to put more into stocks as prices decline. You can take this quiz from Vanguard to get a sense of your risk tolerance.

Once you've done that, review your portfolio's current allocation (you should be able to do this online), to see if it's where you want it to be, either based on your new risk tolerance, or because the stock market's swings set it slightly out of whack. Then, buy and sell shares to rebalance to the appropriate allocation. Normally, this means to "sell just enough of your winning investments and add that money to your laggards to bring your portfolio back to its original allocation, or the one that is right for you today," writes Penny Wang for Consumer Reports. Counterintuitive, but so it is.

You can do this now, or on your birthday or on your next personal inventory day. The important part is knowing what you're comfortable with, and knowing where your money is going.


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