You know investing plays an integral role in your financial future, but are you doing enough to help protect your money from swings in the market? When it comes to investing, many people opt for a hands-off approach. In many ways, that makes sense. Investing over the long term has generated wealth for a lot of people. But if you’re not rebalancing your portfolio, your approach to investing might be too hands off.
You’ve likely heard people talk about rebalancing, calculating percentages, and crunching weights of asset classes. Maybe it’s felt too complicated or you didn’t think your net worth was high enough to worry about portfolio rebalancing.
The truth is portfolio rebalancing can be much simpler than it seems, and it can play a key role in helping to grow your net worth.
Let’s explore what rebalancing your portfolio actually means and dig into some portfolio rebalancing strategies that might help you build and protect your family wealth and your retirement.
What does rebalancing your portfolio mean?
Before you think about rebalancing portfolio strategies, you need to know what it means to rebalance your portfolio.
Think about rebalancing a portfolio like an alignment for your car–or your spine! When roads (or life!) send us bouncing along, we take our cars and our bodies in for an alignment.
The same thing can be true for your portfolio. As the market ebbs and flows, your investments may start to shift. For instance, that might mean that the value of your bonds increase and maybe some of your equities drop.
Those bumps can jostle the overall balance of your portfolio. In the earlier example, when your bonds grow, your portfolio becomes more conservative than you originally intended. So when you rebalance your portfolio, you shift things around to ensure that your investments stay aligned with your risk tolerance and investing goals.
Why is it important to rebalance your portfolio?
You can certainly keep driving for some time without an alignment, you can also keep investing without rebalancing. But you may not want to!
Investing in different assets can lead to different outcomes. Someone who is looking for maximum portfolio growth over several decades is going to have a different portfolio makeup than someone who only has a short time horizon and needs to be more conservative with their risk.
If you don’t rebalance your portfolio, it can drift away from your goals and away from your risk tolerance. Your money will stay invested, but not in a way that aligns with your values. To optimize the way your money works for you, consider rebalancing your portfolio regularly.
Portfolio rebalancing strategies
When you’re ready to rebalance, consider implementing one of these portfolio rebalancing strategies.
Schedule a time
One portfolio rebalancing strategy suggests that investors schedule regular intervals to rebalance. Perhaps once a year or maybe even once a quarter. While many financial strategists recommend rebalancing regularly, for individuals managing their own portfolios it isn’t realistic or necessary to be acting too frequently.
When you decide on an interval that suits your investing strategy, put it on your calendar and add it to one of your net worth review sessions.
Apply the 5/25 rule
A solid rule of thumb is the 5/25 rule from Larry Swedroe.1 When an asset class shifts from its original target by 5%, you should rebalance it.
Let’s imagine that your portfolio is originally 80% stocks. But then, the actual value shifts to 75% or 85% of your portfolio makeup. Since your investment makeup moved by 5%, you would rebalance your portfolio.
But what happens when your portfolio only gives a small percentage to a certain asset class? Maybe you want to keep 5% of your portfolio in emerging markets or international bonds. You wouldn’t wait for the value to hit 0% before adjusting your portfolio. Instead, you use the “relative 25” portion of the 5/25 rule. If that value drops to 3.75% or bubbles up to 6.25%, that asset moves a relative 25% from its original target. In that case, you would also rebalance.
Use the Investment Check Up Tool
If rebalancing a portfolio gives you flashbacks to your high school calculus class, it’s not actually that complicated.
In fact, you can use Empower’s Investment Check Up tool to get a free analysis of your portfolio to see how well it matches your risk tolerance and goals. This tool can be especially helpful as your investing goals change, your timeline shifts, or your risk tolerance adjusts.
How rebalancing your portfolio supports a healthy retirement
Rebalancing your portfolio can help with every step of your journey toward retirement and later in retirement itself.
As your time horizon changes, your portfolio should too. Whether you’re working toward a traditional retirement age or have a goal of retiring early, your portfolio is likely going to initially focus on growing your assets. However, as you move closer to retirement, your portfolio needs may change.
Rebalancing the asset allocation can help you transition from growing your assets to preserving your nest egg.
When you cross the finish line and finally retire from work, that doesn’t mean you should retire from portfolio rebalancing. Instead, you want to continue to rebalance to help ensure that you manage your risk and keep working toward your goals.
Final thoughts
Portfolio rebalancing is an important part of investing that is sometimes overlooked. Perhaps it felt too complicated or you worried that your net worth wasn’t high enough for rebalancing your portfolio to benefit you.
Virtually all investors benefit from portfolio rebalancing. One tool to help with portfolio rebalancing is to use Empower’s Investment Check Up tool. Then, you can rest assured that your portfolio is set up to help you achieve your family’s financial goals.
1 A Wealth of Common Sense, “The Larry Swedroe 5/25 Rule,” March 29, 2014.
RO 2875298_0523
