Why rebalance

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These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Financial Advisor Portfolio Construction. What Is Rebalancing? Key Takeaways Rebalancing is the act of adjusting portfolio asset weights in order to restore target allocations or risk levels over time. There are several strategies for rebalancing such as calendar-based, corridor-based, or portfolio-insurance based.

Calendar rebelancing is the least costly but is not responsive to market fluctuations, meanwhile a constant mix strategy is responsive but more costly to put to use. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation.

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Partner Links. There are two general ways to approach rebalancing. You can either rebalance your portfolio at a specific time interval say, yearly , or you can rebalance only when your portfolio becomes clearly unbalanced.

There's no right or wrong method, but unless your portfolio's value is extremely volatile, rebalancing once or twice a year should be more than sufficient. When market values plunge, instinct tells us to sell our holdings before conditions get worse.

And, when market values only seem to rise and "everyone" is making money, that's when we want to put our money into the market. This is human nature, but it is also the exact opposite of buying low and selling high. Being essentially forced to sell high and buy low is one of the most significant benefits of maintaining a balanced portfolio over time.

Restoring balance to your portfolio could involve selling some of your bond investments and buying stocks while they're cheap. Establishing a balanced portfolio and taking steps to keep it that way can help you to avoid relying too much on emotions when making important investment decisions. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price.

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So, read on to dig into the practice of rebalancing. Rebalancing means realigning the weight of the different assets in your portfolio to maintain your desired asset allocation based on your risk appetite. The process involves periodically reviewing your investments to maintain balance between securities that tend to carry more risk like ETFs or stocks and more conservative investments like municipal or treasury bonds.

Because stocks, the higher-risk asset, now make up a heavier portion of your investments, your portfolio is more reliant on their success.

To return to your original asset allocation, you can choose to reallocate portion of your investments in the high-performing stocks in your portfolio to purchase more bonds. Keep in mind: Gains are never guaranteed in the stock market, and you may have to rebalance after sustaining losses. If low-value stocks cause your asset allocation to skew more heavily toward bonds or other securities, you may want to rebalance to return to the balance that you desire.

This will also give you a chance to review gains or losses on your investments and decide whether to redirect your investments elsewhere. Another method for determining when to rebalance is only doing so when your asset allocation has changed significantly. When you rebalance your portfolio, the goal is to align your portfolio with your desired asset allocation. As your goals shift, your time horizon can change, and your risk tolerance may fluctuate. Those changes can impact the assets in which you invest.

You are likely to have a higher risk tolerance in your 30s than in your 60s , which may translate to a heavier allocation of stocks than bonds at earlier stages of life.

On the other hand, you may find yourself able to take on a more aggressive asset allocation.