How to Rebalance
Now comes the sticky part: figuring out just how to rebalance.
Rebalancing would be much simpler if all your money was in one account. But you may be investing for one goal via various vehicles. For instance, you may have some retirement assets in an IRA, more in an employer-sponsored retirement account and even some in a taxable account.
If these accounts are all funding one goal, they are, for all intents and purposes, part of one portfolio. So when you rebalance, you're probably not just going to rebalance your employer-sponsored account; you'll probably want to rebalance across all of these accounts simultaneously.
The steps below discuss how to go about the process of rebalancing.
Step 1: Recall your target portfolio mix.
You may need to reacquaint yourself with your intended asset allocation mix. What percentage of your portfolio did you want to have in each different
Step 2: Compare your target asset allocation to your current allocation.
If market conditions have changed your asset allocation, you need to find out exactly how and where those changes have taken place. Scottrade Portfolio Review Tool can help you with this step. You can use side-by-side pie charts provided in our X-Ray tool to compare your current and target allocations and identify the adjustments you may need to make to re-align your portfolio with your target.
Remember that all asset allocation tools have limitations. We discuss the limitations of allocation tools in the Determining Your Asset Mix module.
Step 3: Determine where your portfolio is out of alignment.
Begin by seeing how your cash and fixed income positions have shifted relative to your stock positions. Very often, the percentage allocated in these areas will have shrunk relative to stocks because, in general, stocks as a group outperform cash and bonds.
Next, examine your style-box mix. Do you have a larger stake in small-cap stocks than you did originally, for example? Or are growth stocks taking up more of your portfolio than they did before?
Then, consider sector exposure. Although you may not have built your portfolio with a specific sector mix in mind, you'll want to be sure that you're not overexposed to one particular industry according to your investment strategy.
Finally, look at your investments one by one. Which ones have performed the best? These investments may now be taking up more of your portfolio than you originally intended.
To help you examine all these areas, you can use our X-ray tool to compare the asset allocation, style-box mix and sector exposure of your current portfolio and a target model to identify the main differences between the two. This side-by-side comparison offers you an easy way to visually determine where you're out of alignment and how far you need to adjust to realign your portfolio with your investment strategy.
Step 4: Rebalance
To restore your intended allocation mix, you may need to pare back the parts of your portfolio that have grown and direct those dollars to the investments that haven't. The Allocation tool inside your account can be used to help update the way your investments are allocated within your portfolio and keep them aligned with your end goal.
Read Next: Rebalancing Guidelines
The analytical tools described in this article are for information purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision.