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What to know before rebalancing your investment portfolio


After a volatile yr for the stock and bond markets, it could be time to rebalance your portfolio by shifting assets back to match your original goals, based on experts.  

As of Nov. 28, the S&P 500 Index was down roughly 17% year-to-date, and the U.S. bond market has dropped by around 13%, leaving many investors with significantly different allocations than one yr ago.

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Typically, you select an initial percentage of stocks, bonds and other assets based on risk tolerance and goals, said certified financial planner Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan. 

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But because the markets fluctuate, the allocation of every kind of asset may shift, and without periodic rebalancing, “the portfolio starts to look very different,” he said.

For instance, in case your goal is 50% stocks and 50% bonds, those percentages could eventually drift to 70% stocks and 30% bonds, which is “far riskier” than the unique allocation, Watson said.

How one can know when to rebalance your portfolio

Generally, investors use certainly one of two strategies when deciding how often to rebalance, Watson explained. 

Chances are you’ll use “calendar-based timing,” comparable to quarterly or annually, or make changes “as needed,” based on a predetermined algorithm, comparable to a selected percentage allocation change, he said, referencing recent Vanguard research on each methods. 

“They showed there’s really no difference from a worth perspective,” Watson said. “It’s really about rebalancing versus not rebalancing.”

The massive piece that may include rebalancing your portfolio is tax-loss harvesting.

Ashton Lawrence

partner at Goldfinch Wealth Management

You possibly can rebalance with latest contributions, including reinvested dividends, or by trading one asset for an additional. Watson generally considers aggregate investments across all accounts and makes the crucial changes in tax-deferred or tax-free retirement accounts. 

Nonetheless, rebalancing in taxable brokerage accounts may provide other opportunities, particularly in a down market, experts say.

“The massive piece that may include rebalancing your portfolio is tax-loss harvesting,” which permits you to offset profits with losses, said Ashton Lawrence, a CFP and partner at Goldfinch Wealth Management in Greenville, South Carolina.

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While the common investor may save tax-loss harvesting for year-end, there have been “several opportunities” throughout 2022 amid the stock market volatility, he said. 

Reconsider your risk tolerance

No matter your portfolio changes, Lawrence said it is important to think about the present economic conditions, including what’s expected to come back. 

“You must all the time double-check your risk tolerance,” he said, explaining that investors are typically more willing to simply accept risk in a bull market and are inclined to change into “extremely risk-adverse” in a bear market.

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