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When and How to Rebalance Your Portfolio

Brad Chastain Director of Education U.S. Money Reserve

Written by Brad Chastain

Aug 25, 2023

Some financial changes are expected and even planned for, like getting married or sending kids to college. But numerous outside forces can also unexpectedly impact a person’s financial situation. That’s why periodically rebalancing your portfolio is often recommended by financial advisors.

Rebalancing your portfolio gives you the opportunity to make adjustments so that your assets remain in line with your financial goals. The caveat is knowing when rebalancing a portfolio should be considered, how to rebalance a portfolio that’s not aligned, and how often a portfolio should be rebalanced. All three play a role in helping to ensure portfolio diversification that can protect wealth when expected and unexpected changes occur.

How to Rebalance a Portfolio—The Basics

Rebalancing a portfolio is a fairly simple concept: It’s a financial strategy in which a person reviews their portfolio regularly to gauge whether it is still optimized to reach goals, then adjusts the portfolio as needed. One reason a financial advisor may suggest that a client rebalance a portfolio is to help protect against market downturns and other events that could cause losses in one or more asset classes.

The Connection Between Asset Allocation and Portfolio Rebalancing

Rebalancing is all about which assets are in your portfolio and the percent each asset comprises of the whole portfolio. In other words, rebalancing involves examining the asset allocation of a portfolio to determine if the mix of assets is ideal.

The right asset allocation largely depends on your:

  • current financial situation,
  • future financial goals,
  • risk tolerance, and
  • time horizon.

Thinking through each point above can help you identify not only what types of assets may be best for your portfolio, but also how those assets should be allocated. If the desired asset allocation doesn’t match what’s currently in your portfolio, it may be time to consider rebalancing.

How Often Should You Rebalance Your Portfolio?

How often should you rebalance your portfolio to help safeguard against possible changes that could affect your financial future? The answer is: It depends.

The financial experts at Vanguard Group have determined there’s not one optimal rebalancing timeline that applies to everyone. Maintaining a balanced portfolio may require an adjustment every few years for one person, while another individual may be better off rebalancing every six months. How often you rebalance your portfolio may depend on your financial goals—this allows you to set a benchmark for triggering a rebalance if you get off-target by a certain degree.

Financial planners may suggest a few other rebalancing strategies:

Time-Only Portfolio Rebalancing Strategy

With this strategy, you simply rebalance your portfolio at a set time. For example, you could choose to rebalance your portfolio semi-annually. Or you may use a time-only strategy that has you rebalance your portfolio every month or every quarter. It’s just a matter of what you decide is the best timeline.

Threshold-Only Portfolio Rebalancing Strategy

The threshold-only strategy takes a very different approach. With this strategy, your portfolio is rebalanced only if it gets enough off-target that it is no longer in line with your financial goals. Predetermined parameters are set for triggering a rebalance, which could happen at any time. However, the higher the threshold is, the less rebalancing will be needed. For example, you could decide that rebalancing needs to occur if your portfolio asset allocation gets 5% off-target. That threshold could prompt rebalancing once a year, whereas a 1% threshold may necessitate monthly rebalancing.

Time-and-Threshold Portfolio Rebalancing Strategy

The time-and-threshold portfolio rebalancing strategy blends the other two strategies. This strategy calls for rebalancing a portfolio at regular intervals, but only if the portfolio is off-target based on a predetermined threshold. Using the time-and-threshold strategy, you could, for example, decide to rebalance your portfolio quarterly if it hits a 10% rebalancing threshold.

When Should You Rebalance Your Portfolio?

Rebalancing a portfolio can be done at any time, but many people are prompted to review their assets when a major life event occurs. While each situation is unique, six major life events may lead to a conversation with a financial planner about portfolio rebalancing.

Marriage

Getting married means embarking on a new life together, which is coupled with various financial considerations.
TD Ameritrade’s 2021 Love & Money survey found that nearly two thirds of Americans reportedly discuss finances with their significant other during the first six months of a serious relationship. From there, the discussions continue. It’s encouraging that 80% of survey respondents say they are extremely or very comfortable talking about money matters with their partner. Yet those conversations aren’t always positive. In the survey, 80% of couples said they disagree about money matters on a monthly basis.

Once you’re married, it may be a good idea to say “I do” to portfolio rebalancing as part of your financial vows to avoid potential issues in the future.

Separation or Divorce

Not only does separation or divorce take an emotional toll, but it can also take a financial toll. After all, a couple’s finances become intertwined once they exchange vows. Not surprisingly, money matters are the second leading cause of divorce, according to a 2018 survey commissioned by Ramsey Solutions.

A separation or divorce could be the right occasion to rebalance your portfolio.

New Job

Starting a new job is much like starting a new school year. You have new people to get to know and new things to learn.

When beginning a new job, it’s important to review your finances—including your portfolio—to see where everything stands. Doing so will give you a fresh look at your financial picture.

Job Loss

Losing a job also sparks a lot of financial reflection. How deep or shallow is your emergency fund? What expenses should you cut? What, if anything, should you change in your portfolio? Without a regular paycheck and employer-matched retirement contributions, you’ll want to take a serious second look at your financial future. Retirement might be further away than you had planned.

New Baby

Bringing a new life into the world is exhilarating and even a little scary. Part of this emotional roller coaster involves all the expenses connected to the care of your baby. Before the baby arrives, you may wish to figure out what, if any, financial adjustments may be required, such as taking out a life insurance policy or rebalancing your portfolio.

Death of a Loved One

The death of a loved one brings a tremendous amount of grief. It also leads to a host of other issues, including a reexamination of your finances and possible rebalancing of your portfolio. This is particularly true if the loved one was a spouse who contributed income to your relationship or a parent from whom you inherited money.

How Should You Rebalance Your Portfolio?

It’s one consideration to take a deep dive into your portfolio when you’re faced with a major life event. However, you may also want to determine whether rebalancing is needed at other times and how to do it.

A big consideration when weighing the rebalancing of your portfolio is your current asset mix. One question you may ask is: Do I need to shift my current allocation of precious metals?

Experts recommend allocating anywhere from 10 to 25% of your portfolio toward tangible assets like gold and other precious metals. Your individual allocation toward gold may depend on how much protection your portfolio requires. In other words, 25% might be a great precious metals allocation for you, while 10% might work better for someone else.

A sample portfolio might include:

  • stock and other equities (25%)
  • cash (20%)
  • precious metals (20%)
  • fixed-income assets (15%)
  • property (10%)
  • other (10%)

Keep in mind, though, that this is just an example of how you might rebalance your portfolio. There are no standard amounts for asset allocation. Your allocation depends on your risk level, time horizon, targets, and financial goals. What’s happening in the economy and global markets may also play a role in when and how you go about rebalancing your portfolio.

Decades of research has shown one strategy that works universally is diversification—having a mix of different assets and asset classes. It’s often a top consideration when developing an asset allocation strategy because a well-diversified portfolio can provide certain advantages compared to a portfolio focused solely on one or two types of assets.

Many financial experts recommend that people consider adding precious metals to their portfolio. There can be three key advantages of diversifying by owning gold:

  • Gold is an essential portfolio protection strategy for many Americans and can provide long-term diversification benefits.
  • Gold is wealth insurance—especially during financial slumps—because its market price isn’t tied to financial markets in the same way as other assets’ prices.
  • Gold has outperformed many major asset classes over time. Research from State Street Global Advisors shows that gold outperforms or remains competitive with other asset classes during black-swan events that involve an unexpected market downturn.

Including gold and other precious metals in a rebalanced portfolio may help you weather inevitable market downturns and disruptive global events, as well as future life events.

Markets change. Your priorities change. Life circumstances change. Regularly rebalancing your portfolio to reflect those changes may help you reach your financial goals. It may also help you better understand how different asset classes can help you build a balanced portfolio.

Discover how precious metals serve as an alternative asset class that can protect against market downturns with our free Gold Information Kit. You’ll learn why gold is used in millions of diversification strategies and how to purchase physical precious metals for your portfolio.

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