Facebook
Twitter
If you are like many investors, chances are you have made an effort to diversify your portfolio but are not quite sure how to rebalance your portfolio.
It’s never too late to start. Rebalancing is the logical next step to diversifying. You balance. And then – in order to help ensure you stay balanced – you rebalance. In the truest sense of the word, rebalancing is not about changing course but working to stay on the course you initially set out on.
But how to rebalance your portfolio in a market that’s volatile or just heading south? Short answer: with a lot of caution. That’s because rebalancing is a lot more complicated than just dumping the dogs. While you may indeed to sell some shares in the process of rebalancing, it should be a thoughtful, rather than a panicked process. And if you remain true to your original investing goals, you may decide to sell some of your best performing investments.
Rebalance Your Portfolio: The Basics
Understanding how to rebalance your portfolio is really about maintaining the balance you started out with. Here’s a super simple example. You’re about 10 years out from your retirement and have settled on an investment strategy of half stock and half bonds in order to maintain some growth potential but also limit risk. But the market’s been roaring ahead. Now the stocks that once accounted for half of your portfolio are approaching 70% of the total value of your portfolio.
Now, it’s reasonable to think that you should hold on to a good thing. Your stocks, after all, are adding a lot more to your nest egg than your bonds. But, if you are committed to maintaining half of your portfolio in bonds, you should ideally sell some of the stocks that have performed so well.
For one thing, they’ve thrown your portfolio out of balance. For another, rising stocks don’t go up forever. Even here at Wyatt Investment Research, where we are big believers in buying and holding for the long haul, we understand that it sometimes makes sense to sell when you’re ahead.
Rebalance Your Portfolio in a Bear Market
Now, let’s look at how to rebalance your portfolio in a different scenario. You’re still aiming for a half stock-half bond mix, but your stocks are falling fast and now account for a lot less than 50% of all your investments. One way to build your stock holdings would be to buy more. And if you happen to have the cash to do so, this might be a good approach, as long as you invest in stocks with strong underlying fundamentals that seem poised to rebound.
On the other hand, if your stock investments are lagging the market by a wide margin, it often makes sense to cut your losses. This is the time when it does make sense to sell the dogs, especially if you are seeking to rebalance your portfolio and need cash for other investments.
The important thing to keep in mind when rebalancing in a bear market or a volatile market is to think before you sell. Understand the difference between stocks that are underperforming the market and stocks that are falling because the business is weak.
Stay Flexible
Ultimately, rebalancing is more art than science. You may have your targeted allocations set in stone, but that exact level of balance will be hard to maintain as markets ebb and flow. Keep your long-term goals in mind but give yourself permission to rebalance your portfolio in broad strokes so that you don’t drive yourself crazy measuring out your holdings to several decimal points.
Once you’ve decided to buy or sell investments, give yourself the time to identify the optimal market conditions. Even if it makes sense to sell, it might not make sure to sell today if markets are reeling from some new economic data.
Give yourself time and give your investments some space. Keep your emotions in check, but remember your long-term goals. And check in from time to time to see how you can stay on track. Rebalancing in both bull markets and bear markets can help you reach your goals.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.