When and why to rebalance
Joel Dresang: Brian, we talk a lot here about balanced portfolios, and the balance is because it helps manage risk. So why would you want to rebalance?
Brian Kilb: Well, I think the need to rebalance might be triggered by any number of things, Joel. Perhaps one trigger might be a change in your own personal circumstances. If you have a plan and a portfolio designed to achieve that plan, certainly if the plan changes, it might be time to revisit whether your allocation should change as well.
Joel: Do you also rebalance when valuations of assets are changing?
Brian: Well, certainly external factors – market-oriented factors – may cause some imbalance in your portfolio.
Last year, for instance, stocks were up appreciably. It was a really good year for stocks. Well, what if you had a good balance in your portfolio and your stocks were up 25 percent?
It may be possible that your stock allocation is a bit heavy. That might be a good reason to go back and reconsider whether some of those gains in stocks should be pared down to put your allocation back in good order.
Joel: Are there times when you’re making strategic plans as far as your assets in a portfolio, and there might be changes in those?
Brian: Absolutely. If changes in the performance of those assets lead you to believe there might be better or worse opportunities ahead, that may drive a decision to lighten up on certain assets or to add additionally to existing assets in your portfolio.
Joel: What reasons would you not rebalance?
Brian: I think current volatility oftentimes is a trigger for a lot of people. “Oh my gosh. There’s a lot going on. Should I rebalance my portfolio?” That’s a good reason not to do it.
You know, oftentimes, you’ll make really bad decisions when you base your decisions on fear or greed, which is often the case in short-term emotional reaction to current volatility.
Joel: Is there a best frequency at which you should rebalance?
Brian: In terms of keeping on top of your portfolio and doing your due diligence, you ought to make sure that there’s a minimum amount of effort you put into your portfolio.
I think for most people, if you in some formal way revisit your allocation twice a year, you’re going to be just fine. However, if things change more rapidly, it certainly doesn’t hurt to address those changes more frequently.
Joel: What are some of the downsides of rebalancing too frequently?
Brian: I think, Joel, there are several things that may happen. Anything done unnecessarily with unnecessary cost doesn’t help your portfolio at all. I think you should be very aware of the tax ramifications, perhaps, of some of the rebalancing that may occur.
I also think there’s just an emotional burden to paying too much attention to this stuff sometimes. If you’re spending too much time focusing on that, you’re going to put a lot of bad energy into something that’s not going to do you a whole lot of good.
Joel: So, balance is a good long-term approach, but it’s also a moving target.
Brian: Like everything, there’s a balance and a reasonable amount of attention that should be paid to it.
Please click here to view a Money Talk Video, in which Bob Landaas explains how balance can trump the ups and downs of financial markets.
Please click here for “Beginner’s Guide to Asset Allocation, Diversification and Rebalancing,” from the U.S. Securities and Exchange Commission.
Brian Kilb is executive vice president and chief operating officer at Landaas & Company.
Joel Dresang is vice president-communications at Landaas & Company.
Money Talk Video by Peter May
(initially posted Feb. 27, 2014)