The Art of Rebalancing
By Ziyah Esbenshade, CFP®, APMA®, CRPC®
Striving for balance is a principle that applies to investing just as it does to other areas of life. When one area gets out of proportion, it can disrupt your financial goals. There are, however, practical strategies to keep your portfolio in balance and your long-term goals on track. In this article, we discuss the basic tenets of not just why you should consider rebalancing your portfolio, but when and how to do so.
Why rebalance your portfolio? The chief purpose of rebalancing is to ensure your portfolio remains allocated according to your long-term financial goals. Over the last two years, the stock market has experienced periods of volatility. Inflation, supply chain problems, global conflicts and other factors continue to affect stock values. More downside volatility is expected in contrast to the pre-pandemic stock market boom. Under these uncertain conditions, it’s especially important to review your portfolio and rebalance your assets as appropriate.
Here are some tips to help you achieve a balanced portfolio: Assess the big picture. Ideally your portfolio is some combination of the four asset classes (stocks, bonds, cash, and in some cases alternatives). Too much of your portfolio in stocks may expose you to too much risk. Treasury bonds and other reliable municipal and corporate bonds can help insulate your portfolio during times of volatility. Alternatives are nontraditional investments that include everything from precious metals, real estate, cryptocurrencies, and carbon credits. Many alternative investments are considered highly speculative and come with greater risk, so they typically will make up a small portion of your portfolio. It’s smart to have a certain amount of cash on hand for emergencies. However, there’s no reason to keep excess amounts of cash in low-interest-bearing accounts if you can get better results in higher yielding investments. Your financial advisor can help you determine the ideal distribution of assets across these groups.
Diversify to insulate your portfolio. Diversification is a strategy of owning a variety of investments within asset classes. The goal is to spread your risk across stocks or bonds in different sectors, industries, and even geographical regions.
Buy and sell strategically. Your financial advisor can help you evaluate stock returns and weed out losers. You may also be advised to reduce your position in a high-performing investment if your portfolio is overweighted. Selling higher-performing investments that are not in tax-deferred accounts such as your IRA may result in capital gains taxes. If you sell an asset at a loss, you may be able to use the loss to offset your capital gains to reduce your tax obligation. This is called tax-loss harvesting.
Revisit your portfolio periodically. Let your financial advisor know about life events that may alter your risk profile. Marriage, divorce, job advancement, and retirement—these and other life changes can affect your investment goals. At a minimum, schedule an annual review with your financial advisor to discuss rebalancing needs.
Consider professional advice. Resist the temptation to manage your portfolio on your own, without the advice of financial professionals. A trusted financial advisor with fiduciary responsibility can help you select suitable investments to meet your investing goals. They can access tools and apply market insights to help you improve your position. Consult your tax professional regarding the tax consequences of your investment activity.
Ziyah Esbenshade, CFP®, APMA®, CRPC®, is a Private Wealth Advisor and Senior Vice President with Pell Wealth Partners, private wealth advisory practice of Ameriprise Financial Services, LLC in Rye Brook, New York. She specializes in fee-based financial planning and asset management strategies and has been in practice for 20 years. To contact her, visit pellwealthpartners.com, call 914.253.8800 or visit our office at 800 Westchester Avenue, Suite 300, Rye Brook, New York 10573.