With a rapidly changing market comes the need to rebalance your portfolio to ensure you maintain your desired asset allocation. Volatile markets and global economic crises don’t happen every day, but they have certainly impacted investors’ portfolio balance in recent weeks. Regardless, it’s best for the long-term growth of your portfolio if you commit to regular rebalancing.
Rebalancing Your Portfolio Matters
Why does it matter if you rebalance your portfolio? It’s an essential step to ensure your asset allocations are in line with both your risk tolerance and your individual investment goals.
When you first enrolled in your company retirement plan, you might have requested a meeting with a DirectAdvisors plan advisor to assess your risk tolerance and allocate your investments to be aligned with one of our model portfolios. We encourage investors to use our sample portfolios and risk tolerance exercises to aid in determining which portfolio allocation strategy is in line with their risk tolerance and investment goals.
Assuming you continue to invest regularly (from each paycheck), your portfolio will grow over time. During a bull market, your stock investments should produce substantial yields, which will be reinvested into the stock side of your portfolio as you purchase more shares.
At the same time, if you have allocated some of your investments to the bond side of the equation, that portion of your portfolio may become, percentage-wise, much lower than the stock side while your stock values increase.
On the flip side, during a bear market or other expected cyclical market downturn, you might see the value of your stocks fall, lowering the percentage of your overall portfolio that they make up. This is normal market behavior and you don’t need to react to market volatility—staying the course is recommended. Additionally, it’s never advised to sell at market lows.
However, revisiting your allocations at some point (whether annually, semi-annually, or quarterly) will ensure you’re on target to meet your investment goals, regardless of how stocks and bonds are performing.
A Balanced Portfolio Reduces Risk
When your portfolio is allocated in line with your risk tolerance and long-term objectives, your risk is reduced. If you are 35 and plan to retire at age 60, you may have a more aggressive portfolio—perhaps 75% stocks, 25% bonds. During a bull market, the growth of your stock investments could easily begin to encroach on these allocations, trending towards 80% or even 85% stocks.
This is fine until markets fall, when you will be left with too much invested in a then-riskier space. By rebalancing your allocation to be in line with your intended stock-to-bond ratio regularly, you can ensure you are prepared for whatever the market brings.
In addition to mitigating risk, regular rebalancing will also ensure you don’t miss opportunities to sell high on overperforming asset classes and to buy low on underperforming investments.
Closer to retirement? It may be even more important for you to frequently revisit your portfolio allocation. Especially in times of economic uncertainty, being sure you have enough money in more stable investment vehicles is critical when you will need access to those funds sooner.
Perhaps you’re on board with the idea of regular portfolio rebalancing but don’t think you can find the time. We are happy to discuss setting up automatic quarterly rebalancing on your portfolio. This way, you have one less thing to worry about, but you will be better prepared for volatile markets over time.
Contact DirectAdvisors today with questions about rebalancing your portfolio or how you can mitigate risk during a volatile market. Our expert team is here to partner with you to ensure you are on track toward your investment goals.