Rebalancing Your Portfolio

By Mitchell J. Smilowitz, CPA

Maintaining your asset allocation is an important part of effective financial planning. Each asset class fluctuates differently in response to market conditions. Over time, the proportion of the various assets in your portfolio changes. If you don’t address this change, you may drift into a portfolio allocation that exposes you to greater investment risk than you want or one that results in a significantly lower return than you had anticipated.

How Does A Portfolio Get Out of Balance?

Here’s an example of how a portfolio allocation can drift. An investor finds a portfolio with 50% allocated to stock mutual funds and 50% to bond mutual funds meets their need for investment return and comfort with risk.

In 2017, their stock funds performed particularly well and now make up 60% of the assets in their portfolio. If their investing goals and style have remained the same, they’ll want to rebalance their portfolio by selling some of their stock mutual funds and purchasing bond mutual funds to keep their portfolio at the 50/50 asset allocation.

This is a very simple example. You probably have more than two asset types in your portfolio.  Regardless of how many types of assets you own – or the proportions of each asset in your portfolio – the principle is the same. As the proportion of the assets varies from your desired allocation, it is important to bring them back into balance – so you stay on track. If you have a question about your asset allocation, please contact us via email or call 888-JRB-FREE (572-3733).

Who Needs to Rebalance?

Most investors with a diversified portfolio should consider rebalancing.

Who Does Not Need to Rebalance?

You may not need to rebalance your portfolio if all of your investments are held within a target date fund such as the Fidelity Freedom Funds offered by the JRB because they rebalance automatically.

When to Rebalance

While there’s no official timetable for rebalancing, it’s a good practice to rebalance your allocation once a year as part of an annual reassessment of your financial plan.

Sell High. Buy Low.

Rebalancing your portfolio has another advantage. The performance of different asset classes can vary greatly from year-to-year. While it may seem counterintuitive to shed the strongest performers, what you’re doing in effect is selling high and buying low.

You don’t know which asset class is going to outperform the others next year. Rebalancing allows you to reap the full rewards of diversification. Trimming back on a winner allows you to buy a laggard, protect your gains and position your portfolio to benefit from a change in market performance.

How to Rebalance Your Portfolio

To rebalance your portfolio, you’ll need to evaluate how well the assets in your portfolio reflect your desired asset allocation. If you are not sure about your target asset allocation, please contact the JRB.

The JRB’s recordkeeper, Alerus, makes it easy to rebalance the funds in your JRB account.

  • Log into your account
  • Under the Main Menu, select “Change My Investments”
  • Click on “Change My Current Account Balance”
  • Set the target percentage of each mutual fund you choose in the “Realign to” column
  • Scroll down and click “Next” (note: the percentages that you enter do not register until you remove the cursor from that field. Click away from the last number you entered for the total to update and the “Next” button will then be available).
  • Clicking "Next" allows you to review what you entered and preview the transaction that will be made. If everything looks good, scroll down and consider reviewing the prospectus of any fund in which you are investing. Click on the checkbox acknowledging that you were offered the prospectuses.
  • When you are satisfied with the change, click “Finish.” The changes will be made at the next market close, typically 4 pm ET Monday-Friday.

In addition to a one-time rebalancing, as described above, Alerus allows you to schedule an automatic rebalancing of your account quarterly, semi-annually or annually. Please call the JRB office at 888-JRB-FREE (572-3733) if you need any help.

Summary

Rebalancing your portfolio is an important part of long-term investing. It is useful to review your asset allocation annually. How far has your asset allocation deviated from your investment plan? Are there changes to your investment goals that may warrant a change in asset allocation?  Not sure how to answer these questions? The JRB can assist you. Please contact us via email or call 888-JRB-FREE (572-3733).