The start of a new year is a natural time to reassess your financial goals and ensure your investments are aligned with your broader strategy. Markets fluctuate throughout the year, and even the most carefully planned portfolios can drift away from their intended allocation. Rebalancing your portfolio helps bring it back into alignment with your risk tolerance, financial goals, and time horizon. In this article, we’ll explore why rebalancing is important, when and how to do it, and how it can optimize your portfolio for the year ahead.
Why Portfolio Rebalancing Matters
Over time, some investments in your portfolio may grow faster than others. While this can increase your returns, it can also lead to an imbalance that skews your portfolio toward higher or lower risk than you originally intended. For example, if stocks have outperformed bonds, your portfolio may now hold more equities than you’re comfortable with.
Rebalancing restores your portfolio to its original target allocation. This tool can help you manage your risk level to align with your goals and potentially mitigate the impact of market volatility on your financial plan.
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Step 1: Review Your Target Allocation
Start by revisiting your financial goals and target asset allocation. Your allocation should reflect your risk tolerance, time horizon, and stage in life. For example:
- Younger investors with longer time horizons may favor a heavier allocation toward stocks.
- Near-retirees or retirees may prioritize income-generating assets and a more conservative allocation.
If your goals or risk tolerance have changed over the past year, it may be time to adjust your targets before rebalancing your portfolio.
Step 2: Assess Your Current Portfolio
Once you’ve clarified your target allocation, compare it to your current portfolio. Look at the percentage of your investments in major asset classes like stocks, bonds, and cash. This is where you’ll likely notice whether one category has grown disproportionately.
For instance, if your target allocation is 60% stocks and 40% bonds but your current portfolio is now 70% stocks and 30% bonds, it’s time to rebalance.
Step 3: Rebalance Strategically
To bring your portfolio back in line, you’ll need to adjust the proportions of your investments. You can do this by:
- Selling overperforming assets: For example, if stocks have grown significantly, you might sell a portion of them and reinvest the proceeds in bonds or cash.
- Reallocating new contributions: If you’re adding money to your accounts, direct those funds toward underweighted asset classes.
When rebalancing, consider the potential tax implications of selling investments in taxable accounts. In some cases, rebalancing through new contributions or tax-advantaged accounts like IRAs or 401(k)s may be more efficient.
Step 4: Don’t Forget About Diversification
Rebalancing isn’t just about asset allocation—it’s also a chance to review your diversification. Make sure your investments are spread across different sectors, industries, and geographies. Diversification helps mitigate risk by reducing your exposure to any single area of the market.
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Step 5: Stay Consistent
Portfolio rebalancing isn’t a one-time task. While the start of the year is a great time to reassess your strategy, regular rebalancing ensures your portfolio stays aligned over the long term. Set a schedule that works for you, whether it’s annually, semi-annually, or after significant market movements.
The Benefits of Implementing Portfolio Rebalancing Strategies
Rebalancing helps you stay disciplined in your investment strategy and avoid emotional decision-making. Instead of chasing trends or reacting to short-term market changes, you focus on maintaining a steady course toward your financial goals.
Additionally, portfolio rebalancing can enhance long-term returns by ensuring your investments remain aligned with your risk tolerance and objectives. While past performance is not a guarantee of future results, a balanced portfolio is better equipped to weather market fluctuations.
Make Portfolio Rebalancing Part of Your Year-End Checklist
As you plan for the new year, consider making portfolio rebalancing part of your financial routine. By aligning your investments with your goals and risk tolerance, you’ll be better prepared to navigate whatever the markets bring.
If you’re unsure where to start or want help analyzing your portfolio, TriCapital Wealth Management is here to provide guidance tailored to your unique needs. Contact us to learn more about our investment management services and how we can help you optimize your portfolio for the new year.
