Rebalancing Your Portfolio - Cornerstone Behavior of Wealth Building
Robert C. Jackson, CFP®, CIMA®, CAIA®, Supervising Director, Investment Management Consulting Group, 1st Global
As a long-term investor, you have created a wealth plan with the guidance of your financial advisor. That initial blueprint represents your unique needs, both now and in the future. The financial capacity to send your kids to college, enjoy a sustainable retirement income, live your dreams and leave your legacy, all depends on your ability to be emotionally and financially disciplined. An integral part of maintaining financial discipline is routine, systematic portfolio rebalancing.
"Clients often have many external influences that impact their resolve to invest prudently and stay the course of their plan, including their own emotions around market fluctuations. I provide my clients with the understanding that they need to help keep their portfolio healthy through ongoing maintenance and rebalancing." - 1st Global Advisor
What is Rebalancing?
Rebalancing allows you to take advantage of rising and falling markets. A systematic approach to buying when the markets are down and selling when the markets are up helps ensure your plan and the weightings in your portfolio maintain a healthy alignment with your needs and ability to accept risk. Other considerations, including transaction costs and taxes should be reviewed individually. Rebalancing your portfolio does not ensure a profit or protect against a loss in a declining market. Regular, systematic rebalancing helps eliminate emotional decision-making and market timing attempts that can be sources of increased risk.
The Lessons of Disciplined Investing
The importance of not allowing the market to determine your asset allocation and risk exposure when asset class weightings have shifted, supports the significant role of and need for ongoing maintenance and rebalancing as an invaluable risk management tool. When the weights of your portfolio components are automatically adjusted back to the target weights both simplicity and discipline are maintained.
However, for some investors, this process can seem counterintuitive, particularly if they see rebalancing as buying what has not "done well" and selling what has. Although past performance is not indicative of future results, historically, investors learned hard lessons of what can happen without rebalancing.
During the "tech bubble" of the 1990s, technology stock prices soared. The euphoria of seeing investments sky rocket became investors' worst enemy. Disciplined investors trimmed positions that had done well and bought what hadn't, lessening exposure to technology and positioning their portfolio to help capitalize on a post-tech bubble market.
Important Steps for Investors
Rebalancing plays an important part of an investor's long-term plan and ability to keep a healthy portfolio designed to meet certain future objectives. Ensure you have the fundamentals of sound wealth planning in place. Contact your financial advisor who has the expertise to help:
- Create a customized, disciplined approach and plan
- Provide education and expectations on investments and their role
- Establish systematic portfolio rebalancing to help manage emotions and risk
- Stay diversified and most importantly, stay invested
- Conduct regular reviews to help ensure your plan is working the way it was designed
- Revisit risk tolerance, overall emotions and feelings about the market
- Ensure there is appropriate monitoring/controls to keep the portfolio on target
- Maintain peace of mind
For more information about the benefits of rebalancing your portfolio, please contact us at 408.288.5111.