Back to Matt's Two-Minute Investing Insights



Rebalancing - Part One:
What It Is and Why It's Essential
When is the last time you rebalanced your portfolio? Let me explain exactly what rebalancing is and why it is so important

You finally set up your investment portfolio. You researched the funds, chose your asset allocation, and authorized a certain percentage of your paychecks to be direct deposited into your investment portfolio. You can pat yourself on the back, but you also must shift into the monitoring stage of investing. Over time, your initial stock/bond allocation, say 60%/40% for example, will drift to 70% stocks or perhaps even to 50% in bonds through normal price changes. That's where rebalancing comes in. I like to think of it as being in the wilderness and hiking to a lake you heard had great fishing. If you initially check your GPS and set off in the right direction for 5 miles without rechecking the GPS, you will likely end up in the wrong place. Rebalancing is the GPS that keeps you on track so you can efficiently meet your investment goals. It does this in two ways:

  1. Rebalancing helps you maintain the risk level you signed up for. Let's say you are comfortable with a 60/40 stock/bond portfolio mix. That reflects your risk tolerance. If you let your portfolio drift to 80/20, the volatility of your portfolio will increase. While it may seem counterintuitive to sell stocks that have been recently performing above expectations, doing so is essential to maintain your targeted risk level and has the benefit of realizing the gains in those holdings. Rebalancing in this fashion helps to automate the process of buying low and selling high.
  2. Rebalancing helps you stick to your long-term investment plan. If your asset allocation drifts and your portfolio becomes more volatile, you will be more exposed to stock market corrections. Losing a significant part of your portfolio can disillusion you and possibly deter you from your long-term goals. By rebalancing the portfolio, you are more likely to stick with your investment plan even in market downturns and meet your long-term financial goals in the expected time frame.
  3. Rebalancing helps you achieve better returns. Research has shown that, historically, when compared to sporadic rebalancing or the complete lack of rebalancing, systematic rebalancing will improve the risk-adjusted returns of your portfolio.
Rebalancing is essential. However, if you would rather be stuck in the wilderness without a GPS than rebalance your own portfolio, I can help. I can get you back on track to meet your investment goals through rebalancing and other services.

For information on how to rebalance, see my article on
Rebalancing - Part Two: How To Rebalance Your Portfolio

Matt Haertzen

Matt Haertzen

For more resources on rebalancing, click on the following links:

Rebalance or Rush Hour? by Research Affiliates

Best Practices for Portfolio Rebalancing by Vanguard

Click here to view our Disclosure



WARRANTIES & DISCLAIMERS

There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

View Disclosure
WT Wealth Management is an SEC registered investment adviser, with in excess of $100 million in assets under management (AUM) with offices in Flagstaff, Scottsdale, Sedona and Tucson, AZ along with Jackson Hole, WY and Las Vegas, NV. WT Wealth Management is a manager of Separately Managed Accounts (SMAs). With SMAs, performance can vary widely from investor to investor as each portfolio is individually constructed and managed. Asset allocation weightings are determined based on a wide array of economic and market conditions the day the funds are invested. In an SMA, each investor may own individual Exchange Traded Funds (ETFs), individual equities or mutual funds. As the manager we have the freedom and flexibility to tailor the portfolio to address an individual investor's personal risk tolerance and investment objectives – thus making the account “separate” and distinct from all others we manage. An investment with WT Wealth Management is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. Any opinions expressed are the opinions of WT Wealth Management and its associates only. Information offered is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. Always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETFs carries certain specific risks and part or all of an account's value can be lost. In addition to the normal risks associated with investing, narrowly focused investments, investments in smaller companies, sector and/or thematic ETFs and investments in single countries typically exhibit higher volatility. International, Emerging Market and Frontier Market ETFs, mutual funds and individual securities may involve risk of capital loss from unfavorable fluctuations in currency values, from differences in generally accepted accounting principles or from economic or political instability that other nations experience. Individual bonds, bond mutual funds and bond ETFs will typically decrease in value as interest rates rise. A portion of a municipal bond fund's income may be subject to federal or state income taxes or the alternative minimum tax. Capital gains (short and long-term), if any, are subject to capital gains tax. Diversification and asset allocation may not protect against market risk or investment losses. At WT Wealth Management, we strongly suggest having a personal financial plan in place before making any investment decisions including understanding personal risk tolerance, having clearly outlined investment objectives and a clearly defined investment time horizon. WT Wealth Management may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption. WT Wealth Management's website is limited to the dissemination of general information pertaining to its advisory services, together with access to additional investment-related information, publications, and links. Accordingly, the publication of WT Wealth Management's website should not be construed by any consumer and/or prospective client as WT Wealth Management's solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the internet. Any subsequent, direct communication by WT Wealth Management with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. A copy of WT Wealth Management's current written disclosure statement discussing WT Wealth Management's registrations, business operations, services, and fees is available at the SEC's investment adviser public information website (www. adviserinfo.sec.gov) or from WT Wealth Management directly. WT Wealth Management does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to WT Wealth Management's web site or incorporated therein, and takes no responsibility therefor. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly.

Contact Matt Today

Contact Matt Today

Reach Matt directly at 520-204-1058
or by using the contact form below.

Your message has been sent. Thank you!
Cancel