Rebalancing: Keeping Your Portfolio in Check

Let’s say you’ve built a portfolio with 60% in stocks, 35% in bonds and 5% in cash. You’re comfortable with this allocation and believe it will help you achieve financial success.

But then, stocks go on a tear and you find yourself with more than 80% of your portfolio allocated to stocks. While ecstatic over your outsized returns, you are now likely taking on more risk than you are willing to handle.

If you still want to maintain that 60-35-5 ratio, you would need to rebalance your portfolio.

“Portfolio rebalancing can be a very critical component to a long-term financial strategy,” said Joe Correnti, vice president of brokerage product at Scottrade. “As the financial markets shift over time, investments may occasionally need revisiting to put your portfolio back on the path you originally planned out.”

Check out some factors you may want to consider when rebalancing your portfolio. These tips are for people who invested with a particular target allocation in mind and want to keep their portfolio on target. It may also benefit you to reconsider how you want to reallocate your portfolio, based on your investment time frame, risk tolerance and financial goals.

An appropriate mix of stocks, bonds and other investments.

  • Over the long-haul, stocks tend to provide higher returns than other investments such as bonds and cash. If this has happened with your portfolio, stocks may take up a larger share than you originally intended. If so, a portfolio rebalance is a good opportunity to shift some of your stock allocation into other investments.    

An appropriate mix of small-cap, mid-cap and large-cap.

  • Not all stocks provide the same rate of return. Over long periods of time, small-cap stocks tend to provide higher rates of returns than large-cap stocks. If you haven’t rebalanced your portfolio in a while, you may have a higher percentage of money in potentially riskier small-caps than you are comfortable with.

An appropriate sector mix.

  • In any given time frame, some sectors – such as health care, technology or industrials, to name a few – outperform the stock market as a whole, while others underperform. The ones that have underperformed could outperform in the future, and vice versa. It may benefit you to occasionally check how your investments are divided by different sectors, and if necessary, to rebalance to your initial target.

An appropriate mix of international and domestic investments.

  • Some investors choose to allocate a specific percentage of their portfolio toward international investments compared with domestic ones. A host of different factors may have contributed to diverging performances between international and domestic investments, throwing off the allocation that was originally intended.

Consider how far off your targets you are willing to tolerate. 

  • Perhaps your ideal breakdown is 60% stocks, 35% bonds and 5% cash. What if stocks jump to 65% of your portfolio, potentially increasing your overall risk? Is that an acceptable amount of risk, or do you want to rebalance? What if stocks dip to 40%? Do you want a higher percentage of stocks (and the higher risk) than that? It may be wise to have a predetermined idea of how far off your ideal targets you are willing to tolerate before deciding to rebalance.

 Include taxes and fees in the equation.

  • Rebalancing usually comes with costs. If you sell your securities for a profit in a taxable account, you could be required to pay capital gains taxes. Other costs to consider include mutual fund sales fees and trading commissions.                          

What do you look for when rebalancing your portfolio?

Scottrade® clients can log in and use the Portfolio Review Tool to help rebalance. You also can read about 5 Variables to Consider in Asset Management.

Investing in international securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.

Bonds involve risks including, but not limited to interest rate risk, reinvestment risk, inflation risk, call risk, liquidity risk, credit risk, market risk, default risk, event risk, and a risk of loss of principal. New issue offerings are sold by prospectus or offering circular available at www.scottrade.com. Investors should read these carefully.

The information and content provided is for informational and/or educational purposes only. The information presented or discussed is not, and should not be considered, a recommendation or an offer of, or solicitation of an offer by, Scottrade or its affiliates to buy, sell or hold any security or other financial product, or an endorsement or affirmation of any specific investment strategy. You are fully responsible for your investment decisions. Your choice to engage in a particular investment or investment strategy should be based solely on your own research and evaluation of the risks involved, your financial circumstances, and your investment objectives. Scottrade, Inc. and its affiliates are not offering or providing, and will not offer or provide, any advice, opinion or recommendation of the suitability, value or profitability of any particular investment or investment strategy.

Scottrade does not provide tax advice. The material provided in this article is for informational purposes only and Scottrade is not responsible for any errors or omissions. Please consult your tax or legal advisor(s) for questions concerning your personal tax or financial situation.

The analytical tools, examples and strategies described are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or endorsement of any specific investment, tool or strategy. The choice to use a specific investment tool or strategy should be based solely on your research and evaluation of risks involved, your financial circumstances, and your investment objectives.

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