How to Rebalance Your Portfolio: 7 Tips from a Financial Planner

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Financial markets are notorious for their constant ebbs and flows, which are all a part of “the ride” that comes with being invested in financial markets. While some may assert that volatility in financial markets is a reason (or the reason) to not participate in financial markets, we ask you to consider another perspective. Volatility is also another way to do as Warren Buffet coaches on, which is to “buy low and sell high.” To say that another way, when you have an investment philosophy that has a plan on how to buy low and sell high, you really need not fear market volatility.

Each investor must be flexible enough and well-coached to handle fluctuations of volatility in financial markets and really understand what the plan is as financial markets rise and fall.

For many investors, a solution to weathering market fluctuations is portfolio rebalancing. Knowing how to rebalance your portfolio improves your ability to maximize investment returns as financial markets rise and fall.

You should note that most 401k’s offer portfolio rebalancing, so getting clear on what it is maybe intelligent and useful even if you are not a Tencap client..

What is Portfolio Rebalancing?

Portfolio rebalancing is modifying your portfolio assets to maintain your desired risk-return profile. This practice ensures that your portfolio remains diversified and aligned with your investment goals.

Investors rebalance their portfolios because market performance influences their asset values. Let’s say you have an allocation of stocks and bonds. If stock prices rose, its allocation would also increase, undermining your initial risk-return profile. You would then sell some of your stocks and buy more bonds and mutual funds to realign your portfolio with your risk tolerance.

Why You Should Rebalance Your Portfolio

Rebalancing your portfolio is fundamental in enhancing your financial well-being and safeguarding your investments. More specifically, it lets you enjoy the following advantages:

Maintaining risk levels

Investing is all about acknowledging and understanding the volatility and “risk” you are subjecting your money to. So determining your risk tolerance is crucial beforehand. However, fluctuating asset values mean your portfolio’s risk profile could drift away from your pre-established preferences, exposing you to more risk, or less over time depending on how markets perform. Rebalancing lets you calibrate your portfolio and return it to the risk tolerance bands you initially selected.

Avoiding overexposure to a single asset class, sector or country

Unchecked growth in specific assets skews your portfolio’s risk profile in the long run. Let’s say you own airline stocks. If its value soars and takes up a massive chunk of your allocation, you may suffer significant losses if the airline’s value tanks. Rebalancing mitigates such risks because you’re proactively diversifying your investments to avoid overexposure.

Adapting to changes in your risk tolerance as you age and get closer to retirement (needing your money)

As you get closer to retirement it will be time to review how much risk your portfolio is subject to and reduce exposure/volatility. For our clients, their age and changes in risk tolerance are the two primary factors we examine as we consider adjusting the allocation of your portfolio. 

7 Tips for Portfolio Rebalancing

Incorporating these additional practices into your portfolio rebalancing strategy can help boost its effectiveness.

1. Understand your risk tolerance

Assess your willingness (and ability) to withstand investment value fluctuations based on your time horizon and risk tolerance. This analysis helps you establish a solid foundation to construct a personalized portfolio and understand the investment methodology your portfolio is subscribed to.

2. Don’t make big adjustments to your allocation during a bear market.

You don’t remodel a ship during a storm. You shouldn’t remodel your investment portfolio during one either. It’s important to be in a well-suited portfolio prior to your account going through a bear market. Everyone is an “aggressive investor” during a bull market; in other words, few investors proclaim to relate to “aggressive” during a bear market. However, during a bear market, it is not the proper time to try to jump from one allocation to another. A bear market calls for patience and for you to “eat your own cooking.” That is, weather the portfolio you selected.

3. Get clear on a rebalancing strategy in your investment philosophy

It’s time to get clear on the rebalancing strategy that guides your investment strategy. There are various approaches to rebalancing, such as:

  • Calendar rebalancing: Analyzing and adjusting your portfolio at a predetermined frequency, often monthly or quarterly
  • Constant proportion portfolio insurance (CPPI): Maintaining a safety reserve as cash or zero-risk government bonds and investing the remainder in higher-performing assets like stocks.

4. Monitor your portfolio regularly

Review your investment performance through portfolio monitoring and management tools to identify deviations from your established asset allocations. With a financial planning team like Tencap, we handle all of our client’s rebalancing quarterly and make any needed adjustments.

5. Consider the costs and tax implications of rebalancing

Rebalancing may entail transaction fees, brokerage commissions, and other expenses that can reduce your returns over time. You should also remember that selling assets in a taxable account triggers capital gains taxes, which could become unmanageable with significant returns.

What fees do Tencap clients incur during rebalancing? Zero fees.

6. Rebalance during the tax-loss harvesting season

Tax-loss harvesting, or deliberately incurring losses to offset your tax obligations, is another tactic to rebalance your portfolio while reducing your tax liability. The end of the calendar year often marks the tax-loss harvesting season—a potential time to review your portfolio, identify investments with unrealized losses, and rebalance them.

7. Seek professional financial advice

While rebalancing is fundamental to investment management, maximizing its opportunities is often tricky, especially if you don’t have prior experience. In such cases, consider seeking professional advice from a qualified financial advisor to help you out.

Reinforce Your Investment Portfolio with Tencap Wealth Coaching

Portfolio rebalancing is a foundation of effective wealth management. Practicing the strategies above can lead to better-informed decisions when maximizing your investment gains long term.

Wealth management and financial planning can be challenging, so don’t hesitate to reach out to us at Tencap Wealth Coaching for guidance. Our experienced financial advisors can help you handle your resources according to your unique financial needs and goals—without breaking the bank.

Contact us to learn more.

Photo of Nick Carrigan
Nick Carrigan
Wealth Advisor

Nick trains and develops families in creating, maintaining, and growing wealth. This includes educating clients on the science and academics of investing, comprehensive financial planning, and ongoing coaching to ensure discipline for a lifetime. Nick has seen this create incredible levels of freedom, fulfillment, and love for the families he works with.

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