Is it time to rebalance your portfolio? Your portfolio should align with your risk tolerance, retirement timeline, and long-term goals. These factors may help you decide on the appropriate asset allocation for your unique situation.
When you rebalance your portfolio, you sell off higher-performing strategies, reinvest the returns, or invest the return into other strategies. Rebalancing your portfolio may help you manage portfolio risk and help improve returns. You may want to rebalance it to help ensure your portfolio’s strategies continue to support your goals. In general, there are three approaches to how often you should rebalance your portfolio, including:
- Time approach: You may rebalance your portfolio every quarter, six months, or year. A time approach prevents you from changing your portfolio based on emotions
- Tolerance threshold approach: The tolerance threshold approach is when you rebalance your portfolio when its allocation deviates by 20% or more. This method helps to remove emotions from your investment decisions based on actual performance rather than an arbitrary period.
- Hybrid approach: The hybrid approach combines the time approach and the tolerance threshold approach. This approach occurs when you rebalance at a regular time interval but only if your portfolio exceeds certain thresholds.
Rebalance your portfolio
Once you determine which asset classes have deviated from the planned allocation or your financial plan, you may want to rebalance if appropriate. Here are the steps to rebalancing:
First, consider the tax implications that come with rebalancing.
While you don’t have to worry about taxes with tax-advantaged accounts like 401(k)s, you will be responsible for capital gains tax on taxable accounts. Consult your tax and financial professionals to help you determine how rebalancing will impact your taxes.
Second, sell the strategies
In the asset classes that have exceeded the planned allocation.
Third, determine if you want to invest
The asset classes that have fallen below your desired allocation, invest in new strategies aligned with your risk tolerance and goals or stay in cash to invest later.
Rebalancing an investment portfolio can be challenging. A financial professional can help you determine if rebalancing is appropriate for your situation, help with the process, and determine the ideal strategies for your portfolio’s new allocation.
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Our family financial services firm, August H. Velten & Associates, has been in business for 12-years in Melbourne, FL. August Velten (CLU) is a 40-year veteran of the Financial Services industry. August is a former instructor for the Life Underwriter Training Council and once occupied the legislative seat for the Maine Association of Life Insurers. In Brevard County, you may have seen him on local access TV or read one of his articles in a local area magazine. Jessica Waterhouse, August’s daughter, left her own practice to join the firm in 2019. Jessica is a Florida licensed insurance producer, securities licensed (Series 65), a long term care specialist (CLTC) and holds certification as a National Social Security Advisor. Both August & Jessica are instructors for financial literacy workshops in both Brevard and Indian River County offering education in Social Security and Financial Planning. Contact the office today to schedule an introductory meeting or review of your current financial plan.
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