A well-balanced investment portfolio is key to long-term financial success. Rebalancing, the process of adjusting your asset mix, is essential in achieving this balance. Here’s why rebalancing your investment portfolio is crucial for managing risk, maintaining discipline, and aligning with your financial goals.

What is Rebalancing?

Rebalancing is periodically adjusting your portfolio back to your desired asset allocation. As investments grow, your portfolio can drift from its original allocation, increasing risk and deviating from your investment plan. Rebalancing brings it back to your target mix.

Why Rebalance?

  1. Managing Risk – Different assets like stocks, bonds, and cash perform differently over time. If stocks outperform, they might dominate your portfolio, increasing risk. Rebalancing restores your original asset mix, ensuring your risk level remains appropriate.
  1. Maintaining Discipline – Investing is simple. But it’s not easy. Investors often make emotional decisions, buying high and selling low. Regular rebalancing enforces discipline by systematically buying underperforming assets and selling overperforming ones, supporting long-term growth.
  1. Goal Alignment – Financial goals and risk tolerance change over time. Rebalancing ensures your portfolio evolves with these changes, keeping your strategy aligned with your current objectives and helping you stay on track.

The Rebalancing Process

Step 1: Assess Your Portfolio

Review your current asset allocation and compare it to your target. If there are significant deviations, it’s time to rebalance.

Step 2: Develop a Strategy

Create a rebalancing strategy considering your goals, risk tolerance, and market conditions. Decide how often to rebalance—quarterly, semi-annually, or annually.

Step 3: Execute the Plan

Buy and sell assets to realign your portfolio. Be mindful of transaction costs and tax implications to maximize your returns.

Step 4: Regular Review

Rebalancing is ongoing. Regularly review your portfolio to ensure it stays aligned with your goals, adjusting as needed.

Professional Guidance Benefits

Working with a financial advisor can enhance the rebalancing process. Advisors bring expertise, monitor your portfolio continuously, analyze market trends, and manage tax implications, ensuring optimal performance. Vanguard’s Advisor Alpha paper suggests that working with an advisor can add up to 0.35% return over time.

Takeaway

Rebalancing your investment portfolio is vital for managing risk, maintaining discipline, and aligning with your financial goals. Whether you do it yourself or with a financial advisor, regular rebalancing helps keep your portfolio balanced and on track for long-term success.


Rich Feight, CFP
Rich Feight, CFP

Hi, I'm Rich Feight I'm a fee-only Certified Financial Planner, successful business owner, and self-made millionaire that knows how to beat the system and become wealthy. I have a lot of clients that have done it too. I'm also pretty good at finding that ever-elusive work/life balance so many of us strive for. Lucky for you I have an abundant mindset and give all my knowledge away on my blog. So if you want to know what it takes to become a millionaire, follow me.