How Often Should a Person Rebalance Their Investment Portfolio?
The values of securities change over time and factors ranging from a particular firm's profit forecasts to the level of unemployment, can make certain kinds of securities more or less attractive over the course of time. Additionally, your own investment objectives may change as a result of life events or changes in your career prospect. If you invest in many different types of securities, you can rebalance your holdings to change the amount that you invest in each type of instrument. While opinions vary among investment analysts, most investment brokers recommend that you should rebalance your portfolio at least once a year.
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Time Frame
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When you create an investment portfolio, you should buy securities that match your projected investment time frame. A young investor can more easily take risks and invest in volatile stocks than someone else who plans to retire in 12 months. The sooner you plan to withdraw your money, the more closely you should keep an eye on your holdings. If you plan to invest for two years, then you may want to rebalance your holdings every quarter to ensure that your investments stay on track. If you plan to invest for 30 years, then even if you forget to check your holdings for a couple of years, you still have plenty of time to recover.
Performance
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Rather than rebalancing your investment holdings based upon a particular date, some investment analysts suggest that you should rebalance your holdings based upon the performance of your investments. If you invest 70 percent of your cash in stocks that perform poorly, and 30 percent in bonds that perform well, then you may find that price fluctuations mean that after a short period of time, the value of your stocks matches the value of your bonds. If you want to maintain the correct balance between stocks and bonds, you should sell some of your bonds and buy more stocks. Therefore, many investors rebalance their portfolios whenever the amount that they own in any one type of security rises or falls by more than 5 or 10 percent.
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Strategy
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If you get married, have a child, get divorced, become disabled, retire or encounter some other kind of life event, your investment strategy may have to change. You might need to move from an aggressive stance to a more defensive one or vice versa. You should, therefore, rebalance your investment portfolio to react to life events. Remember that some events, such as retirement, are more easy to predict than other events and, therefore, you cannot set a long-term schedule for rebalancing based upon the projected dates of life events. You may have a succession of life events in a single year that cause you to rebalance your portfolio several times.
Mutual Funds
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Mutual funds contain a multitude of different types of stocks, bonds and other kinds of securities. When you buy a mutual fund, you relieve yourself of the responsibility to rebalance your portfolio because the fund manager performs that duty on behalf of all of the fund's investors. Most funds automatically rebalance when the fund becomes top-heavy with any one kind of investment. Managers also rebalance to react to changes in the value of securities. However, if your overall investment strategy changes, you should consider moving your assets to a new mutual fund with a strategy that best suits your needs.
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References
- Schwab; Why You Should Rebalance Your Portfolio; Bryan Olson; November 2007
- Morning Star: Rebalancing Your Portfolio
- Securities and Exchange Commission; Beginners' Guide to Asset Allocation, Diversification, and Rebalancing; August 2009
- Fox Business; The Right Time to Rebalance Your Portfolio; Sonya Stinson; July 2011
Resources
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