Rebalance portfolio?

[Hedy]

Do you have your 401K set to rebalance every 6 months? Why or why not?

[PauletteGoddard]

Re: Rebalance portfolio?

No, I rebalance my retirement portfolio every two years. I know my investments are in ETFs and index mutual funds for the most part. I haven't felt any pressure to shrink the rebalancing interval yet. Maybe when I enter my 50s I'll pay closer attention.

[kv968]

Re: Rebalance portfolio?

Do you have your 401K set to rebalance every 6 months? Why or why not?

I don't. My 401k doesn't have the option of being rebalanced automatically so I couldn't even if I wanted to. I do it annually or even earlier if the percentages get too far off my original allocation. Every 6 months is too frequent for me.

[Hedy]

Re: Rebalance portfolio?

I don't. My 401k doesn't have the option of being rebalanced automatically so I couldn't even if I wanted to. I do it annually or even earlier if the percentages get too far off my original allocation. Every 6 months is too frequent for me.

Ok. Can you explain why one would rebalance?

[kv968]

Re: Rebalance portfolio?

Ok. Can you explain why one would rebalance?

I'll give it a shot
Assuming that you have an asset allocation mapped out (which you should) for your investments between size, sector and style that reflects your risk tolerance, investment goals and horizons, rebalancing brings your portfolio back to that original allocation. Different portions of your investments will (or should at least somewhat) perform differently than other sectors and when that happens if you don't rebalance them every so often you'll end up with areas either overweighted or underweighted as compared to your original plan.

For example, you decide to have a 70% stock/ 30% bond allocation. Say stocks do very well one year and bonds stay flat. That may result in something more like a 80/20% ratio by the end of the year. In order to maintain the original 70/30% you have to either sell 10% of stocks to purchase 10% of bonds (preferably done in a tax-sheltered account) or put more money in bonds (preferably done in a taxable account) to get them back to 30%.

There's also the theory of the "rebalancing bonus" where by rebalancing you're selling some funds when they're higher priced and buying some funds when they're currently lower priced. The old "buy low/sell high" trick. Does it work all the time? No, but there've been studies that show it does slightly boost returns over the long run when done faithfully.

It's all about sticking to your original plan. Again, assuming you have one in the first place

[meaghanchan]

Re: Rebalance portfolio?

My IPS (investor policy statement) states that I rebalance once every 3 months, with new money.

Let's say I had a $9,500 portfolio on January 1, set to be 90% stocks/ 10% bonds.
Let's say by March 1 that portfolio had grown to $10,000, but drifted to 92% stocks/ 8% bonds.
Let's also say that I planned to add $1000 to this portfolio every quarter ($4000/year).
So on March 1 (or over the next 3 months) instead of adding $900 to stocks and $100 to bonds, I would add $700 to stocks and $300 to bonds, to get back to my target allocation.

Of course, all this is moot right now, since I'm only in one target retirement fund, so no rebalancing required.

Rebalancing is very important if you want to keep your allocation the way you want it, and if you want your risk to stay where you've already determined it should be. If you've decided that the best plan for you is 75% stocks/ 25% bonds, for example, just because the stock market's done really well over the past year doesn't mean that now the best allocation for you is 80/20. Rebalancing tells you to sell high and buy low, and return to what you'd already decided was best.

[tinapbeana]

Re: Rebalance portfolio?

my 401k had no option to automatically rebalance itself, but i would do so every 3-6 months. ML had a tendency to drop old funds and bring in new funds once or twice a year, so sometimes a fund i had allocated a certain % of my money to was no longer there to get that percentage. other times, i would be really interested in one of their newer offerings. or a fund would have changed some of it's holdings.

did i always make the right decision? i'm sure i didn't, but the portfolio as a whole returned 15-18% every year so i was satisfied with my results.

[kv968]

Re: Rebalance portfolio?

If you've decided that the best plan for you is 75% stocks/ 25% bonds, for example, just because the stock market's done really well over the past year doesn't mean that now the best allocation for you is 80/20.

This is an important aspect of rebalancing that requires discipline. Rebalancing can easily become a case of "chasing the hot sector" if you're not disciplined enough to move the money back to the original allocation when a certain sector or fund is doing really good. That's where the debate of when or how rebalancing should be done comes into play. You could decide to rebalance either when percentages get out of a predetermined range or by a timeline such as annually, semi-annually, etc. The key is to have that plan and stick to it. Sure there will be times when you pull some money out of a fund or stock and they continue to do well and you want to kick yourself in the butt, but there's also times when it works the other way around. I've been known to have a little "delayed reaction" in pulling money out of a fund that's been doing good in order to rebalance

[bjl584]

Re: Rebalance portfolio?

I cannot automatically rebalance, but I do review the performance of the funds that I own on a quarterly basis with my financial advisor.

[kv968]

Re: Rebalance portfolio?

I cannot automatically rebalance, but I do review the performance of the funds that I own on a quarterly basis with my financial advisor.

Reviewing quarterly is good. However, does he/she suggest you move things around quarterly?

[sweeps]

Re: Rebalance portfolio?

Reviewing quarterly is good. However, does he/she suggest you move things around quarterly?

And if the answer to that is yes, does he or she get sales commissions every time you adjust?

[kv968]

Re: Rebalance portfolio?

And if the answer to that is yes, does he or she get sales commissions every time you adjust?

Exactly

[Hedy]

Re: Rebalance portfolio?

I'll give it a shot
Assuming that you have an asset allocation mapped out (which you should) for your investments between size, sector and style that reflects your risk tolerance, investment goals and horizons, rebalancing brings your portfolio back to that original allocation. Different portions of your investments will (or should at least somewhat) perform differently than other sectors and when that happens if you don't rebalance them every so often you'll end up with areas either overweighted or underweighted as compared to your original plan.

For example, you decide to have a 70% stock/ 30% bond allocation. Say stocks do very well one year and bonds stay flat. That may result in something more like a 80/20% ratio by the end of the year. In order to maintain the original 70/30% you have to either sell 10% of stocks to purchase 10% of bonds (preferably done in a tax-sheltered account) or put more money in bonds (preferably done in a taxable account) to get them back to 30%.

There's also the theory of the "rebalancing bonus" where by rebalancing you're selling some funds when they're higher priced and buying some funds when they're currently lower priced. The old "buy low/sell high" trick. Does it work all the time? No, but there've been studies that show it does slightly boost returns over the long run when done faithfully.

It's all about sticking to your original plan. Again, assuming you have one in the first place

Thank you!

[kv968]

Re: Rebalance portfolio?

You're welcome