Most brokers offer a way to view a breakdown of your asset allocation, usually on the home page or a click away from it. If not, or you can't find your asset allocation, here's a quick way to calculate it:. Unfortunately, there's no perfect method of determining your ideal asset allocation. Many financial planners -- myself included -- have a rule of thumb they like to use, but it's important to emphasize that even with a good rule, your personal situation must be considered.
The real value of rebalancing your portfolio - MoneyWeek
My preferred method of determining your ideal asset allocation is to take your age and subtract it from to determine your ideal stock allocation, with the remainder mostly in bonds. I'm generally not a fan of keeping large amounts of cash equivalents as an investment until you're retired, but to be clear, this allocation formula is only referring to investment accounts.
It's still a good idea to keep a cash emergency fund to help with unforeseen expenses. However, after you apply this rule, consider your own situation. For example, if you consider yourself to be more of a risk-tolerant person and short-term market fluctuations don't bother you too much, it could be a good idea to shift your ideal allocation in favor of stocks.
On the other hand, if stock market swings keep you up at night, it could be a smart idea to err on the side of caution and allocate a little more to bonds or even to cash. After all, a higher potential return isn't worth sacrificing your own mental health! Once you've determined your target asset allocation, the next logical question is "When should I rebalance? There are two general ways you can choose to do this. First, many investors like to rebalance their portfolios at set time intervals. In other words, maybe you could rebalance your investments every year on the same date, no matter how much your balance has changed.
Alternatively, you could choose to only rebalance your portfolio once it moves out of equilibrium by a certain amount. A Vanguard report determined that the best course of action to maintain a desired risk-reward profile while minimizing rebalancing expenses involved monitoring the portfolio either annually or semi-annually and only rebalancing when the allocation is more than 5 percentage points away from the target.
This way, you avoid excessive rebalancing in reaction to every single market swing and only do a periodic rebalancing if your portfolio is seriously out of alignment. There's another type of rebalancing that I would put into its own category. Over time, your desired asset allocation is likely to shift -- after all, most asset allocation rules of thumb are based on your age.
This is a step beyond just rebalancing, as it involves a shift in your asset allocation strategy and is often referred to as reallocation. Consider this example.
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So even if your portfolio composition didn't change much over those five years, it's entirely possible that an age-based rebalancing could be a good idea. The basic idea behind rebalancing is simple: Sell some of your highest-performing investments and buy more of your lowest-performing investments. If you invest through a robo-advisory service or are trying to rebalance a retirement plan such as a k , it's worth mentioning that many of these services offer an automatic rebalancing feature.
You may even be able to set it up so that your account automatically rebalances at an interval of your choosing.
Hypothetical portfolio rebalancing example
Back to the how-to discussion, while the standard way to rebalance is to sell some investments and buy others in order to restore your account's balance, there's an alternative that could be a better option if it's practical for you to do. Instead of selling investments and buying others, you can potentially rebalance your portfolio by allocating new money strategically. Bancorp Investments is exclusively for our customers. Log in to open an account today or call Investment and Insurance products and services including annuities are:.
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What Is Portfolio Rebalancing?
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Investment and insurance products and services including annuities are available through U. Bancorp Investments, the marketing name for U. Bancorp Investments, Inc. Bancorp and affiliate of U. Pursuant to the Securities Exchange Act of , U. Bancorp Investments must provide clients with certain financial information. The U. If the current level is too high for your risk tolerance, you can return to your original allocation.
Current Mix 3 years later. She did it by selling shares in her stock funds and buying additional shares in bond and money market funds. The information in this chart is hypothetical and used for illustration purposes only.
How Investment Diversification Works
It is not intended to predict the actual performance of any particular investment. The effect of taxes and the costs of investing have not been reflected. Depending on the type of investment, rebalancing can be regular and automatic.