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Rebalance Your Portfolio

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Welcome to Spring Cleaning Week! This is the first post of the week and something I think too many people overlook – rebalancing your investment portfolio.

Rebalancing your portfolio is important because the key to investing is establishing a plan and following it. You can’t predict the bubbles before they happen in the hopes you can buy on the upswing. You can’t predict the sharp drops in the hopes you can sell before they hit. What you can do is establish a reasonable plan, adjust it as needed, and follow it to prosperity. With that in mind, the goal of rebalancing is to get your investment reality back in line with your plan.

This post is part of the 2011 Spring Cleaning Week!


Review Your Asset Allocation

Before you can rebalance your portfolio, you need to take a look at your asset allocation. When you rebalance, you’ll be adjusting your investments so that they return to the correct allocation. If you don’t have an allocation, you’ll need to determine it. If you do, you’ll need to review it to make sure it’s still what you want.

Determining your asset allocation can be tricky because there’s really no “right” answer for everyone. Some people go with putting 120 minus your age as a percentage of stocks, the balance in bonds. John Bogle, in a recent Money interview (Jan/Feb 2011 issue, page 104), said he puts his age in bonds and the rest in stocks. The important part is deciding an allocation and making sure it fits your needs and your risk profile.

Determine Rebalancing Frequency

There are varying schools of though on how often you should rebalance your portfolio but everyone agrees it should be done at least once a year. I’ve heard of people adjusting it twice a year and sometimes four times but once seems to be the minimum.

Rebalancing Your Portfolio

The actual rebalancing part is usually quite simple, especially if you have all of your investments in one place. Simply shift your assets around so that they better reflect your intended asset allocation. I have all of my funds in index funds at Vanguard and so I’m able to shift dollars around at no cost.

One key point to keep in mind is trading restrictions. Certain funds limit how often you can enter and exit. I own shares in Vanguard High-Yield Tax-Exempt Fund (VWALX) and you cannot buy into that fund if you sold shares in the last 60 days. This means that you should do the math on paper before executing any transactions just so you don’t get caught being unable to adjust assets properly.

Rebalancing your portfolio is something that you should consider at least once a year and now is as good a time as any.

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9 Responses to “Rebalance Your Portfolio”

  1. Shirley says:

    OK, you’ve got me going and I seem to have a lot more in Mutual Funds than either method you mentioned suggests. Perhaps our ages (69 and 73) make this more practical?

  2. cubiclegeoff says:

    I always forget when I rebalance since I never keep it on a schedule. Having your 401k or other plans do it automatically makes it easier.

  3. cubiclegeoff says:

    As for diversification, everyone talks about stocks vs bonds vs cash. But no one seems to want to make suggestions on other categories, international vs domestic, small vs med vs large cap. These are also important for rebalancing.

  4. M says:

    “I have all of my funds in index funds at Vanguard and so I’m able to shift dollars around at no cost”
    Don’t you still have to pay capital gains taxes on the amount that you sold/moved? Paying taxes on the gains always makes it harder for me sell as a way of rebalancing. Instead, I change what I buy for a few months to try to balance things that way. (For example, if I want 30% bonds, 70% stocks, but my portfolio is 25% bonds, 75% stocks, I buy more bonds and fewer stocks for a few months). Not a perfect method, though.

    Also, I *think* in Bogleheads they determine that it is optimal to rebalance every year or two. More frequent rebalancing actually hurts your returns.

    • zapeta says:

      I do the same thing. I try to just direct my contributions for a few months to balance out my portfolio. I just think its a lot easier.

  5. eric says:

    I just did some of this today with my contribution to my Roth IRA. Wow, I’m on top of things. :P

  6. dude says:

    I’m wondering at what point should I rebalance. I checked over the weekend and each fund I’m invested in is just a few percentage points away from my targets. At this point, I’m thinking it’s not worth the fees to transfer to move 1 percent from one fund to another.

    As for asset allocation and the amount I’m investing, I’m pretty aggressive. I figure I won’t need this money for another three decades at most, but I might not be able to contribute as much through that entire time — if I take time off or change jobs to have kids, for example. I have the confidence of knowing that I’ll at least benefit from compound interest of all the money I’ve socked away, but I need that money to grow as much as possible until then.

  7. skylog says:

    thank you for the reminder. i going to use this post as motivation to finally add some reminders into google calendar to make sure i keep on schedule.

  8. Donald Martin says:

    I am looking for a good commodity broker. Any suggestions.


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