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Rebalancing your portfolio: Here’s what that means and how often you should do it

Giovanny Moreano, on

Published in Home and Consumer News

When rebalancing a portfolio, you may opt to add a combination of index and thematic investments to your stock allocation. By employing one or both strategies, the key is to keep fees low and remain diversified.

Rebalancing for retirement

Outside of personal investment accounts, retirement accounts deserve special attention as your age will primarily determine how assets should be allocated.

The principles and strategies for rebalancing a portfolio are essentially the same. However, by taking a holistic view of all of your retirement accounts (401(k), IRA, Roth IRA), you might discover that your desired asset allocation is out of proportion.

When dealing with multiple accounts, consider consolidating all of them with an online portfolio tracker, or by keeping them at the same financial institution. Even if your accounts are actively managed, having them under one view should make it easier to track.

Target-date funds could also be advantageous for those investors who prefer a more hands-off approach. These managed funds change the risk profile based on your expected retirement age, selecting more conservative assets as you get older.


How often should you rebalance?

There is not a hard-and-fast rule on when to rebalance your portfolio. But many investors make it a habit to revisit their investment allocations annually, quarterly, or even monthly. Others decide to make changes when an asset allocation exceeds a certain threshold such as 5 percent.

Research from Vanguard shows there is no optimal rebalancing strategy. Whether a portfolio is rebalanced monthly, quarterly, or annually, portfolio returns are not markedly different.

Actually, by checking your investments too frequently, you might end up making emotional decisions in the moment instead of sticking to your long-term goals. Several studies of behavioral finance reveal investors might be tempted to alter asset allocations based on market volatility instead of their financial goals.


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