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{Listen to the audio of this section and be sure to review your workbook action items at the bottom of this page}

Balancing your portfolio is basically you checking in on your portfolio periodically as time progresses, to ensure that your asset allocations are accurate and performance is going as expected.

 

For instance, let’s say you’d like to keep 70% of your portfolio in stocks and funds (a.k.a. equities) and 30% in bonds to mitigate risk regardless of how the market is doing, and this all equals a $100,000 portfolio ($70,000 equities and $30,000 bonds) but over time the value of your equities double and are now valued at $140,000 but your bonds are still valued at $30,000. Your portfolio is no longer balanced. Your equities now make up 82% of your portfolio. 

If your objectives remain the same, you’d need to rebalance your portfolio by selling some equities (~ $21,000) and buying some more bonds to get you back to that 70/30 split. If your objectives have however changed and you are ok with this change, then there’s no action required on your part.


When to rebalance your portfolio

To elaborate even more, you want to rebalance your portfolio if:

  1. Major gains or major losses significantly change your asset allocation objectives e.g. how much money do you want to have in one asset class or industry or type of investment and have major gains or major losses changed your asset allocation?
  2. When your financial goals and objectives change e.g. perhaps you move your retirement date to ten years earlier or ten years later
  3. As you approach retirement and need to get more conservative with your investments so that if the market goes through a decline you are not as heavily impacted. 

 

A common rule of thumb - 100 minus your age

A pretty common rule of thumb and basic investing principle when it comes to keeping your portfolio balanced, is the the rule of "100 minus your age". It essentially guides you to reduce your risk as you get older by helping you determine how much you should keep in equities (stocks and funds) versus how much you should keep in bonds.

For example, If you are 30 years old, then 100 minus your age equals 70. This then indicates a guideline of keeping 70% of your investments in equities and the other 30% in bonds. Again this is just a general guideline and not gospel. Ultimately, the way you balance your portfolio should be based on your objectives.

If you have a high risk tolerance, you can modify this rule to 110 or 120 minus your age.


How often should you rebalance your portfolio?

 You don’t want to find yourself rebalancing your portfolio too often or for no reason at all. A good measure is to review your allocations and rebalance if needed once a year. Rebalancing more than once a year might be excessive and also expensive due to fees and taxes.

If you are in a target date retirement fund, then you don’t have to worry about rebalancing, as this is done automatically in the fund each year as you move closer to retirement.

If you have investments with a robo-advisor, many times, automatic portfolio rebalancing based on the objectives you have set, is an option given to you. Just login to your account or give them a call to confirm.


Use your workbook (located in the investing main menu) to get an idea of how you can balance your portfolio based on 100, 110 or 120 minus your age using the following pages: 

  • 100 Minus Your Age