Rebalance Education

Benjamin Haas |

This is a very difficult time.

When it comes to your savings and investments, I ask you to join me in the following:

  • Trust your plan and stick to having money in each of your three buckets; cash, bonds, stocks based on your personalized financial plan [Review concept here]
  • Try to remember, that as uncomfortable as it is right now, when it comes to investing, we need to do our best to look past the short-term gyrations and focus on the long-term opportunities, especially during periods of market dislocation.
    • How do we position things to work towards the long-term rate of return we need for your financial plan?
    • What updates should we now make based on a new environment?
    • Where do you want to be for the next 3 to 7-year cycle?
  • With that in mind, let’s review the concept of rebalancing portfolios

What is a rebalance?

When we started investing, we chose investments spread out among different asset classes, which when put all together, created an “allocation” based on risk and reward. Essentially, we keep 3 different investment buckets; cash, bonds, stocks. When markets move over time, or abruptly as they have these last few weeks, the overall allocation changes, which may mean we are no longer positioned the way we want to be.

Rebalancing is the process of realigning the weightings of your portfolio by buying or selling to maintain, or in this case “go back to” our original or desired mix of assets. Said more plainly, your long-term equity bucket has recently shrunk. Rebalancing would place more money back into that bucket.

For example, say an original target asset allocation was 40% stocks and 60% bonds. If the stocks performed well during the last 10-year period, it could have increased the stock weighting of the portfolio to 50%. By taking gains/income every year, you were selling some stocks and buying bonds to get the portfolio back to the original target allocation of 40%/60%. Now over the last few weeks, the original target asset allocation of 40% stocks and 60% bonds may have shifted to 35% stocks and 65% bonds. By rebalancing, we would be selling some bonds and buying stocks to get the portfolio back to the original target allocation of 40%/60%.


Why is it important to do?

Rebalancing is adhering to the age-old investment advice of “sell high and buy low,” taking the gains from higher-performing investments and reinvesting them in areas that have not yet experienced such notable growth. Or in this case with the stock market’s downturn, selling some of our bond holdings that have held up better than stocks and buying back into those stocks, if they appear to be undervalued. 

What is the ultimate goal? If we believe in the recovery of stock prices, and trust that they will outperform fixed income returns again as they have over long periods of time, then no matter the period of time it takes for stocks to recover from this recent drop, you should rebalance. By doing so and going back to the target weighting for stocks, theoretically, will shorten your recovery time.


When should I do this?

This is the part that requires some additional thoughtfulness and conversation. While “now” is better than never, we do want to do our best to execute this rebalance at a time we feel more confident represents “the bottom.” We do not believe we can time this perfectly, but want to be mindful and disciplined in our approach.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  All investing involves risk including loss of principal.


Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.


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