Check Out This Ultimate Checklist for Rebalancing Your Portfolio

rebalancing your portfolio - Check Out This Ultimate Checklist for Rebalancing Your Portfolio

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If you’re serious about investing, you need to take the time to occasionally and devote it to rebalancing your portfolio. Rebalancing is a way to reevaluate where you stand as an investor, including your current distribution of assets, then sell and/or buy different assets to end up with a different distribution.

So what’s the point? There are two main reasons why you should consider rebalancing your portfolio:

  • Age. When you’re young, your risk tolerance is high—your capital will be limited, and you’ll have plenty of time to make up for any losses you sustain. As you age, you’ll want to gradually shift into more conservative assets like bonds and low-risk mutual funds. Rebalancing helps you adjust your portfolio to reflect that level of risk tolerance (and prepare you for retirement).
  • Potential gains. Rebalancing also helps you pull out of a declining market or enter into an emerging market. For example, you might shift from the energy industry to the tech industry if you feel there’s strong potential there in the next few years.

These are both beneficial to you, especially as you grow older, so what exactly should you be doing when you “rebalance” your portfolio?

Rebalancing Your Portfolio Checklist:

1. Audit your initial assets and balance

First, take inventory of all your current assets and where they lie. Look at your 401(k), your IRA accounts, your brokerage accounts, and any other accounts where you currently hold money.

Figure out how much money you have in stocks, bonds, mutual funds, options, futures, real estate, and other bank products, and map out those percentages. You’ll also want to examine where you stand in terms of domestic assets, international assets, and individual markets (such as finance, pharmaceuticals, and retail).

2. Analyze your ideal portfolio balance

Next, look at your “ideal” portfolio balance. If you’ve laid out a plan for this, you should be able to simply look at where you are and compare it to where you want it to be. If you aren’t sure what your “ideal” portfolio balance is, you can calculate your risk tolerance and ideal distribution based on your age and when you plan to retire. Take note of any discrepancies and set those notes aside.

3. Review underperformers

Next, review areas that have underperformed in the past year, and why they’ve underperformed. Are these particular market segments getting ready for a downturn? Did you make a mistake in choosing them in the first place? If it looks like you’re in store for more losses, this is your chance to get out—and that may mean deviating from your “ideal” hypothetical balance.

4. Review potential new opportunities

Similarly, read the news and embed yourself in investor forums to learn of potential new opportunities. Are there any emerging markets that have high potential growth in the near future? Are the returns for one type of investment higher than usual? It may be worth adjusting your positions to take advantage of those opportunities.

5. Sell and buy shares to rebalance

After you’ve reviewed where you are, where you hypothetically should be, and what types of investments promise to increase or decrease in value, it’s time to take action. Sell or buy shares in each area until you’ve managed to achieve the “ideal” portfolio for this stage in your life and this place in the market.

Try to do this in as few transactions as possible, as most brokerage services will charge you a transaction fee for buying or selling.

There is one exception to portfolio rebalancing; if most of your money is tied up in target-date funds, which are automatically rebalanced to reflect your current risk tolerance and investment goals, you shouldn’t need to manually rebalance them in an additional step.

Timing and Frequency

How often should you go through this process? Since one major motivation for rebalancing is your age, it’s unwise to rebalance too frequently; your risk allocation at 35 won’t be much different than your risk allocation at 36.

However, markets change relatively often, so checking your portfolio balance at least once a year is generally recommended. Even if you don’t change anything, you should at least determine where you stand.

If you’re interested in taking advantage of smaller changes in the market, or are a more aggressive investor, rebalancing your portfolio quarterly could be more appealing to you—just don’t let a temporary fluctuation trick you into rebalancing in an unnecessary way.

As of this writing, Jenna Cyprus did not hold a position in any of the aforementioned securities.


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