The past two years have been great for the US stock market. Many investors have watched their portfolios grow as markets hit new highs and returns exceeded expectations. While this is certainly cause for celebration, it also raises an important question: Is it time to rebalance your portfolio?
Rebalancing is the process of adjusting your investment mix to maintain your desired level of risk and return.
Over time, as different assets perform differently, your portfolio can drift away from its original allocation. The last two years of stock market performance have likely caused your portfolio to hold a higher percentage of stocks than you initially intended, potentially exposing you to more risk than you're comfortable with.
Why Rebalancing Matters
Manage Risk: If your portfolio becomes too heavily weighted toward a single asset class, like stocks, a sudden market downturn could result in larger losses than you anticipated. Rebalancing helps bring your portfolio back in line with your risk tolerance.
Capture Gains: By rebalancing, you can lock in gains from well-performing assets and reallocate those profits into underperforming or less risky ones. This takes the guesswork out of buying low and selling high.
Stay Disciplined: Rebalancing encourages a systematic approach to investing. Instead of making decisions based on market emotions, you’re sticking to a strategy aligned with your long-term goals.
When Should You Rebalance?
There are no one-size-fits-all rules for when to rebalance, but here are some common approaches:
Time-Based Rebalancing: Revisit your portfolio at regular intervals, such as annually or semi-annually.
Threshold-Based Rebalancing: Rebalance whenever your asset allocation drifts by a certain percentage (e.g., if your stock allocation is 10% higher than your target).
Given the strong market performance of recent years, now might be an ideal time to assess your portfolio’s balance. Ask yourself:
Has my stock allocation grown significantly beyond my target?
Am I comfortable with the level of risk I’m taking?
Would reallocating some of my gains into bonds, cash, or other asset classes better align with my financial goals?
Considerations before Rebalancing
Review Your Target Allocation: Ensure your target reflects your current financial goals and risk tolerance.
Assess Your Portfolio: Compare your current allocation to your target.
Consider taxes: Rebalancing is selling assets at a gain, meaning if you’re not careful you may cause yourself an unexpected tax bill.
Rebalancing your portfolio isn’t about timing the market—it’s about maintaining a strategy that supports your long-term objectives. The market’s strong performance is a great opportunity to evaluate your investments and ensure you’re still on track to meet your goals. By taking a disciplined approach, you can manage risk, capture gains, and continue building wealth confidently.