Rebalancing Your Investment Portfolio

Rebalancing Your Portfolio

Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is that the best approach?

It may sound counter intuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent — and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio has its risk profile shift over time.

When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Next, individual investments are selected that pursue the overall objective. If all the investments selected had the same return, that balance — that allocation — would remain steady for a period of time. But if the investments have varying returns, over time the portfolio over time may bear little resemblance to its original allocation.

How Rebalancing Works

Rebalancing is the process of restoring a portfolio to its original risk profile.

There are two ways to rebalance a portfolio.

The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.

The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.

Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.

Shifting Allocation

Over time, market conditions can change the risk profile of an investment portfolio. For example, imagine that on January 1, 2000, an investor created a portfolio containing a mix of 60% stocks and 40% bonds. By the end of 2011, the mix would have almost exactly reversed to 60% bonds and 40% stocks.

Bradley Bofford currently resides in Mahwah with his wife, Lauren, and two daughters. Bradley can be reached at 973-582-1002 or BHBofford@FinancialPrinciples.com.  

Securities offered through Securities America, Inc., member FINRA/SIPC, Bradley H. Bofford, CLU, ChFC,CFP® Registered Representative and Advisory services offered through Securities America Advisors, Inc., Bradley H. Bofford, CLU, ChFC,CFP®, Investment Advisor Representative. Financial Principles, LLC and the Securities America companies are not affiliated. The above information is based upon sources believed to be reliable, however it cannot be guaranteed. It is not considered an official statement of your account with Securities America, Inc. (SAI), nor has the performance data been audited by SAI or the individual product sponsor(s) as to its accuracy. In this regard, please refer to the confirmation notices and statements that you receive from SAI and/or the individual product sponsor. All investments contain risk and there is no guarantee that any goal or objective will be achieved. An investor should carefully consider the investment objectives, risks, charges and expenses before investing. The fund prospectus contains this and other information about the investment company. Contact your representative for a copy of the prospectus, which should be read carefully before investing.

This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. Copyright 2013 FMG Suite.