Rebalancing is a key part of maintaining a healthy investment portfolio, but it’s often misunderstood. Many investors think it simply means selling off high-performing stocks and reallocating proceeds to those that have underperformed. While that’s part of it, effective rebalancing is so much more as we will show you below.
Looking Beyond Individual Positions
At its core, rebalancing helps reduce concentration risk, ensuring you’re not overly exposed to any one asset or sector. But it’s also a chance to step back and assess broader market and macro-economic conditions. Are interest rates shifting? Are currency fluctuations or geopolitical events affecting your holdings? Are there emerging opportunities worth exploring? Rebalancing provides the perfect opportunity to take a big-picture view, challenge your assumptions, and make strategic adjustments.
How Often Should You Rebalance?
There’s no universal rule. Some investors rebalance quarterly, others annually. The right frequency depends on market conditions, portfolio performance, and your personal financial goals. Typically, rebalancing includes:
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- Adjusting your asset mix (e.g., between equities and fixed income)
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- Reassessing individual position sizes and the relative price changes between asset classes
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- Reviewing external factors like interest rates and foreign exchange trends
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- Adjusting to any changes in the geopolitical and policy landscape (tax changes, etc.)
Aligning with Your Goals and Risk Tolerance
Your portfolio should reflect your current and future cash needs, your comfort with risk, and your investment timeline. These factors evolve, and your asset mix and holdings should evolve with them. For example, if you’re approaching retirement, you may want to shift more into fixed income for stability and predictable income.
Rebalancing in Volatile Markets
Market fluctuations can be unsettling, but they also present opportunities. Rebalancing often means selling assets that have grown beyond their target allocation and buying those that are undervalued. This disciplined approach follows the timeless principle of buy low, sell high. It helps manage risk, smooth out volatility, and potentially improve long-term returns.
Planning for Cash Flow
Rebalancing is also a great time to review your upcoming cash flow needs. At Lighthouse Wealth Management, we work with clients to earmark funds for short-term needs by holding appropriate amounts in high-interest savings and short-term fixed income. This ensures that when markets decline, we’re not forced to sell equities at a loss, an essential strategy for clients who rely on their investments for income.