In its most basic sense, rebalancing refers to the process of periodically buying or selling assets in a portfolio to maintain your original or desired level of asset allocation or risk. You, as the investor, may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation — or in other words, rebalance your portfolio.
If you’ve never rebalanced your portfolio, or it’s been a while, it might be time to consider taking a look at your portfolio’s assets to ensure it’s in line with your goals. Read on for some rebalancing insights.
Why is rebalancing important?
Assuming you’ve built your portfolio based on where you are in your career, your time horizon (i.e., how much time you have before you retire), and your own risk tolerance, you might be surprised to know that your portfolio’s risk level could change even if you didn't change any of your investments. As such, it’s possible that your portfolio could become “over-weighted” in a certain asset class, perhaps one you didn’t originally intend to have so much weight in. We illustrate what this looks like later in this article.
Rebalancing and market volatility
Investing is emotional — it’s your money! Watching your portfolio’s returns go up and down can be emotionally trying. Rebalancing to a predetermined, diversified asset mix makes it so you may not have to worry about market instability quite as much. It’s human nature to have some stress about things that are not in our control, and the market is definitely an area where we as investors lack control of how it will react in the future. But when you maintain the appropriate asset allocation for you, it can serve as a buffer against extreme swings in the market.
The purpose of rebalancing isn’t to “time the market” in hopes of gaining greater returns. No, the purpose is to manage risk. The idea is that rebalancing your portfolio could help mitigate your risk in the event of a market downturn by fluctuating less when there is a downturn. Historically, the more exposure you have to equities, and the more money you have invested in stocks, compared to bonds or fixed income, the higher the returns. But there is a “risk/reward” trade-off, meaning of course the more exposure to equities, and the higher the percentage of money that’s invested in stocks, the level of risk increases, which would increase the opportunity for losses in your portfolio in the event of a market downturn. How does this work?
The risk/reward trade-off
If you don't rebalance, you may wind up with an asset mix that doesn't match your risk tolerance. Having a larger-than-planned allocation to stocks may seem harmless when stocks are surging, but no market rally lasts forever, and if the market takes a downturn, you might be overexposed in riskier investments than you originally intended. Someone who never rebalanced would likely see their portfolio's risk level (as measured by allocation to stocks) increase consistently over time. Let’s look at an illustration of how this works.
Let’s assume that you originally selected an asset allocation of 50% stocks and 50% bonds. If four years go by during which stocks return an average of 8% a year and bonds 2%, you'll find that your new asset mix is more like 56% stocks and 44% bonds. As you can see in this example, your exposure to stocks has increased and so too has the risk. You might then choose to rebalance your portfolio back to their original targets.
Financial experts recommend that you check your portfolio at least once a year, and if your mix is off by at least 5 percentage points, consider rebalancing. If you’ve chosen to allocate your funds in a target date fund, those will automatically rebalance themselves. However, although the target date fund’s allocation will rebalance automatically, you should still check the allocation of your fund to ensure that it still aligns with your risk tolerance and meets your needs according to your present situation.
As you can see, it’s important to keep an eye on your portfolio to ensure it’s still aligned with your own personal and unique life situation as well as with your personal risk tolerance. As a general rule of thumb, it’s recommended that you check your allocations annually and rebalance when you feel it’s necessary.
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The $1 bill hasn’t been redesigned in more than 50 years.
In 1996, the government began redesigning the $100 note, as well as other notes in the following years, to better protect it against counterfeiting — the first major change in 67 years. The $1 bill, on the other hand, is so rarely counterfeited that there are no plans to redesign it.
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