For many of us, balance is something we seek in life. Maybe it’s balancing your work and home life or finding harmony between eating healthy salads and indulgent desserts. Whatever balance looks like in your world, applying this idea of equilibrium can be beneficial in your investment strategy, as well.
When we refer to “balance” in an investment portfolio, we’re talking about asset allocation – the diverse mix of investments in different asset classes. Asset classes have their own correlation between risk and reward. When beginning your investment strategy, it can be wise to align your portfolio that mirrors your own risk tolerance.
But just like a vacation can derail months of diet and exercise, over time, market fluctuations can offset the balance of the assets in your portfolio. When this happens, the act of rebalancing your portfolio can help get things back on track.
What is portfolio rebalancing?
Rebalancing is the realignment of different asset classes in your portfolio to match your desired risk tolerance. In other works, this act resets portfolio risk back to intended risk levels and functions as a systematic way remain within an investor’s given risk tolerance.
ARGI’s Approach to Rebalancing
There are many ways to rebalance a portfolio, but we break it down into two simple ideas: regular rebalancing and opportunistic rebalancing.
Regular rebalancing is based on the idea of a scheduled set of reoccurring assessments, very much like your annual checkup. At your annual doctor’s visit, they will assess your vitals and may prescribe some changes to get you back on a healthy track. In theory, this annual assessment will help you stay on track toward your long-term health goals. Regular rebalancing is very much the same. At regular intervals, reassessing your asset allocations and altering your portfolio mix helps you reset your strategy to its original intent.
Opportunistic rebalancing is a slightly different approach. We know that the market is an everchanging ecosystem. Sometimes market volatility can present an opportunity to make some changes within your portfolio construction, but that does not mean reacting to short-term market fluctuations. Our investment philosophy is centered on long-term efficient capital markets, so opportunistic rebalancing doesn’t come up that often. In fact, the last time ARGI rebalanced portfolios on an opportunistic basis was during March 2020.
When is it time to rebalance?
While there are no set requirements on when to rebalance, we’ve found there are several factors to consider. As we mentioned, the ultimate goal of investing is to align your risk tolerance to your portfolio construction. When your risk tolerance changes, it may be a good time to reassess your asset allocations. Your personal financial situation can often influence how much risk you’re willing to take in your investments. Changes in risk tolerance can be impacted by a variety of things including age, career changes, marriage or children.
If you have questions about your current risk profile or your portfolio balance, contact your investment advisor. They can help you create a systematic approach to align your investment strategy with your current and future goals.
Disclosure: Past performance, including hypothetical performance, is no guarantee of future results. Diversification and asset allocation help you spread risk throughout your portfolio, so investments that do poorly may be balanced by others that do relatively better. Neither diversification nor asset allocation can ensure a profit or protect against a loss.