The 4 Optimal Times to Consider Rebalancing Your Portfolio

Navigating the investment world is like hopping on a roller coaster—ups, downs, twists, and turns galore. Whether you’re a hands-on trader or prefer a laid-back approach, there’s a secret weapon you should always keep in your investment arsenal: portfolio rebalancing. It’s like fine-tuning your financial playlist to match your goals and risk vibe.

Do you know what Rob Haworth (that investment strategist guru) says? “Rebalancing your portfolio? It’s like a dance between risk and reward.” It’s the game-changer that keeps your investments in harmony, even when the market’s spinning. So, let’s roll through four epic moments when tweaking your portfolio can make a splash in your financial journey.

When There’s Market Volatility

Market volatility is one of the most common triggers for portfolio rebalancing. It’s a way to gauge how far your investments have strayed from your target goals. Consider setting “drift parameters” in consultation with a financial professional to do this effectively.

These parameters define the level of volatility you can comfortably handle. If you find yourself reaping double-digit gains or suffering double-digit losses, it’s a clear signal to rebalance.

Antoni Shkraba/ Pexels | Market volatility is one of the most common triggers for portfolio rebalancing

Imagine a simple portfolio with 60% stocks and 40% bonds. When the stock market is soaring, your stock holdings might increase. However, it’s time to rebalance if stocks start creeping up to 70% of your portfolio. This approach allows the market some wiggle room while flagging extreme deviations.

But remember, don’t get swept up in the media’s sensationalism. Instead, use market volatility reports as conversation starters with your financial professional.

When Major Life Events Are on the Horizon

Major life events often prompt a closer look at your investments. You might already have a diversified strategy that suits your changing priorities, but big milestones are an ideal time to review your holdings.

For instance, receiving an inheritance after a family member’s passing could boost your investment capacity. In this case, rebalancing should be part of the plan. Haworth advises, “From a returns perspective, we advocate investing any windfall fully and right away, rather than waiting.”

Life-changing events can also lead to a complete reassessment of your financial goals. Rebalancing can help you create a new portfolio tailored to your evolving needs in the face of unexpected situations, such as a health crisis.

Karolina Grabowska/ Pexels | Major life events often prompt us to reassess our investments

When Diversification Concerns Arise

Diversification is a cornerstone of a well-performing portfolio. If you have doubts about your portfolio’s diversification, consult your financial professional about rebalancing.

Similarly, if you’re intrigued by new investment opportunities, like international stocks or emerging technology companies, consider rebalancing to incorporate these assets.

When You’ve Neglected Rebalancing for Too Long

If you haven’t rebalanced your portfolio recently, it’s high time to reconnect with your financial professional.

Haworth recommends reviewing your portfolio on a quarterly or annual basis. He emphasizes, “This reassessment may not lead to any activity, but at least you’ll know you’re on track.” Regular check-ins help you stay informed about your portfolio’s performance and maintain a level-headed approach rather than reacting to market turbulence.

Tima Miroshnichenko/ Pexels | Successful investing is about managing risk, not avoiding it

The Costs of Portfolio Rebalancing

While rebalancing offers numerous benefits, it’s essential to acknowledge the associated costs. Transaction costs can eat into your returns, especially if your deviations from your target are minor, around 1 or 2%. In such cases, the costs often outweigh the benefits.

Rebalancing With a Financial Professional

A financial professional brings invaluable expertise and analytical tools when considering rebalancing. They can evaluate market trends and fundamentals, ensuring that any rebalancing activity aligns with your unique situation. Remember, sometimes, it may be wiser to hold off on rebalancing if the market is heading in a certain direction without solid supporting fundamentals.

Having this extra layer of analysis can provide the confidence you need to make informed investment decisions. So, when in doubt, don’t hesitate to consult your financial professional and take proactive steps to keep your portfolio on track.