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3 Easy Steps to Rebalance your Portfolio

If you clicked on this article, you’re probably wondering if now is the right time to rebalance your portfolio. Before you start making wholesale changes, though, consider what your investment goals are and how long you’re willing to wait before tapping into your savings. A perfectly balanced portfolio for you can look vastly different than a balanced portfolio for someone with different goals.

What is a Balanced Portfolio?

A balanced investment portfolio is diversified in a variety of asset classes. Some of these include stocks, bonds, mutual funds, real estate, and foreign assets. Each of these asset classes has a different level of risk and they should be balanced according to your age and risk tolerance.

Why Should I Rebalance My Portfolio?

If you have all your investments in stocks and the market takes a dive, then the entirety of your savings goes down with it. With a balanced portfolio, you’ll still feel it when the market goes down, but you will have a variety of other investments to cushion the blow. In your younger years, you can afford to follow the ebbs and flows of the market because you’re likely not planning to use those investments for income until retirement. In this case, you may want a much higher ratio of stocks rather than bonds, which are lower risk but provide lower returns on your investment.


Step One: Decide on Your Ideal Allocation of Assets

Deciding on your ideal allocation of assets will be entirely up to you. Everyone has a different level of risk-aversion, and we all have different ideas of when and what our retirement will look like.

Think about what you did with your investments the last time the stock market fell. Did you sell any stocks that you had planned to hold long-term? If so, you may want to choose a more conservative mix of assets, such as 50 percent stocks and 50 percent bonds. But if you instead decided to double down on your investments when the stock market fell, you may be best off with a mix of 80 percent stocks and 20 percent bonds. You can take this helpful survey from Vanguard to figure out what exactly your preferences are.

Step Two: Review Your Portfolio

Now that you know what your ideal mix of assets looks like, it’s time to review your current portfolio and see what needs to change. If you have an investment account online, you should have a dashboard that shows you what percentage of your money is invested in each asset category.  Let’s say you have $10,000 in your investment account, and you see that 60 percent is invested in stocks while the remaining 40 percent is in bonds. If you’d prefer an 80/20 split instead of a 60/40, you would simply sell half of your bonds and use the proceeds to reinvest in stocks.


Step Three: Rebalance Only When You Need To

Some suggest rebalancing your portfolio once a year, but even that frequency might be too high, depending on how old you are. If the market is steady, your investments are likely staying aligned on their own. The time to consider rebalancing is after a significant shift in the market. If stocks dive down 10 percent, you’re going to want to add more exposure to stocks in your portfolio to make up for it.

The best time to buy into the stock market is when it drops. Buying low and selling high is the oldest investment advice in the book and for good reason. When risk-averse investors are selling off shares to recoup liquidity, you should see this as a buying opportunity. If you doubled down on your portfolio in 2008, for example, you made exceptional returns on your investments.

What if I don’t want to worry about rebalancing?

In the past you had two options for creating a balanced portfolio: pay a financial advisor or do it yourself. These days, however, there are “robo advisors” that will balance your portfolio for you.

One of these is Acorns, a free service that automates your savings for you. The basis of the program is that your purchases are rounded up to the nearest dollar and then invested in the market. Let’s say you link your credit card and spend $50.50 on dinner. That leftover $0.50 will be added to your Acorns account. As soon as you reach $5 worth of roundups, the money is invested according to your preferences.

Acorns gives you five different options for your portfolio:

  • Conservative – for people close to retirement or have a low tolerance for risk.
  • Moderately Conservative – similar to conservative but with more exposure.
  • Moderate – a portfolio balanced between equity and fixed income.
  • Moderately Aggressive – for people willing to stay in the market long term.
  • Aggressive – for those with the highest tolerance for risk.

You can also adjust your portfolio at any time. If you’re 30-years-old and don’t mind a little risk, you may opt for the aggressive portfolio. Once you turn 40, you may want to dial it back a bit to moderate or moderately aggressive. While this is an inexact science, it’s an excellent option for people who want to be more hands-off with their investments.

If you want a little more control over your investments, investigate using a service such as M1. The first step you take when you open your account is to choose investment options to create a pie.

M1 pie picks

With M1, you can customize exactly how much exposure you want to different markets. After taking the Vanguard quiz, my ideal mix came out to be 70 percent stocks and 30 percent bonds. On my M1 profile, I chose to invest 30 percent in the Vanguard Total Bond Market and split the remaining 70 percent in the stock market. There are thousands of stocks and ETF’s you can choose from, and you can also decide to browse expert pies if you’d rather not select one on your own.

M1 pie

Bottom Line on Balancing Your Portfolio

Once you’ve identified what a balanced portfolio means to you, the rebalancing part becomes second nature. When markets make big moves, you should review your portfolio and see what needs adjusting. If the stock market goes up, you may be more exposed to stocks than you had planned and will want to sell some to reallocate funds. When the market goes down, it’s the perfect time for you to buy low as you rebalance your assets. Or you may want to be completely hands-off with your investing. If so, there’s an app for that.

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