To Balance Again or Restore to the Correct Balance


What do you do when you receive your quarterly account statement? Check the balance, then toss/shred/delete? You understand investing for the long-term and follow the buy-and-hold strategy. Those are great investing practices. However, there’s another essential strategy you should follow: periodically reviewing your investments to make sure your portfolio is still in balance with your goals. If not, it may be time to rebalance.

Diversification Lays the Foundation

When building your portfolio, you determined your comfort level with risk, which helped you decide which investments to choose. A well-balanced portfolio should include investments that give you the right amount of risk and reward to reach your goals: this is called an asset allocation strategy. Spreading your money among stock, bond and money market funds can help lower your overall investment risk during market ups and downs.

Maintain Your Balance

Once you have an asset allocation mix that suits you, it’s important to keep it in line. Over time, it’s likely that outside factors, such as volatile market conditions and changing interest rates, will cause your allocation to veer off course from the percentages you set for each investment type.

Here’s an example. You decided to invest 60 percent in stocks, 30 percent in bonds and 10 percent in money markets. If market activity causes the value of your stock portion to increase significantly, you will have a greater percentage of stocks in your portfolio, and less in bonds and money markets. This can inadvertently cause the risk level of your portfolio to drift away (sometimes too high, and sometimes too low) from its desired state.

Rebalancing will return your portfolio to the 60/30/10 percentage mix. This simply means you adjust — sales, purchases or exchanges — to bring your portfolio back in line with your asset allocation plan.

Think of it like what a gardener does with a growing plant. Once you pick the right tree/bush/flower to plant (based on your goals, objectives, climate, soil type, etc.) you plant it, but the work doesn’t stop there. Some parts may grow faster or higher while other parts may lag or struggle.

Pruning redirects energy to the right parts of the plant to ensure proper growth going forward. It’s an ongoing process to keep a lively, healthy plant that meets the goals and objectives you’ve established for it.

Hypothetical example

Example Allocation


Let the Experts Keep You Balanced

Another way to diversify and keep your investments balanced is to invest in an asset allocation portfolio, also called a fund-of-funds. These mutual funds offer a diversified portfolio in a single investment and typically include a mix of stock, bond and money market underlying funds. They are designed for balance, convenience and risk management. And the investment managers automatically rebalance the portfolios when needed.

There are generally two broad types of asset allocation portfolios — risk-based and timed-based. You choose which one, depending on your investing style.

Set a Rebalance Timetable

Experts disagree on how often you should rebalance, but all agree it should be done regularly.  These decisions should be made based on your individual circumstances and investments. We believe setting aside time twice a year on easy-to-remember dates, like January 1 and July 4, is a good strategy.

No one knows how the markets will move, so rebalancing based on market swings — or timing the market — may lower your returns substantially. Rebalance when you need to get your target mix back on track. If your investments are in taxable accounts and you’ve owned them for more than a year, any taxable gains resulting from their sale will be considered long term and subject to lower tax rates than short-term capital gains.

Ready for the Right Mix?

If you have questions about whether you need to rebalance, we’re here to help. Contact us or use our investment planner tool to see if you’re still on target with your goals.

This information is for educational purposes only and is not intended as investment or tax advice.

Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.

Diversification does not assure a profit nor does it protect against loss of principal.

The opinions expressed are those of Brent Hoskins and are no guarantee of the future performance of any American Century Investments fund.