Why Now Is the Time To Rebalance Your Portfolio

A man of the Millennial Generation is looking at his financial statement while eating lunch at a local sushi restaurant.
RichVintage / Getty Images

Rebalancing your investment portfolio is a time-tested method to help dampen volatility and improve long-term returns. However, rebalancing without a plan can be more damaging than helpful. There are times when you should definitely rebalance your portfolio, and other times when you might be better served by waiting. Given the current state of the economy and the financial markets, now might be one of those times when you should consider rebalancing. Here’s a look at the reasons why.

Check Out: 13 Ways To Invest That Don’t Involve the Stock Market
See: Stocks That Would Have Made You Rich Today

Rebalancing According To a Calendar Isn’t Ideal

Traditionally, investors have been told that the best time to rebalance a portfolio is annually, often at the end of the year. While rebalancing in general is to be encouraged, arbitrarily assigning a calendar date to when you should rebalance is inefficient at best. Rebalancing is only necessary when a portfolio is no longer in line with its stated investment objectives and risk tolerance. In other words, rebalancing every year on Dec. 31 isn’t necessary if the portfolio is still balanced. Rebalancing can also involve costs, in the form of either commissions or tax consequences, so it should only be undertaken when appropriate.

Building Wealth

Be Aware: 13 Toxic Investments You Should Avoid

Your Stocks May Be Overextended

August might seem like a random time to be rebalancing a portfolio, but depending on the state of your investments, it might be warranted. After getting absolutely decimated in February and March 2020, the stock market has been on a tear, bouncing back hard from its 2020 lows and going almost straight up ever since. It’s entirely possible that some of the stocks in your portfolio, or your stock allocation in general, have tremendously outperformed your other investments, leaving your portfolio out of whack. As October is typically one of the worst months for stocks, it might be a good time to trim some of your outsized positions before the end of summer.

More Options: The Most Fascinating Things You Never Knew You Could Invest In
Find Out: Ways Investing Will Change in the Next 25 Years

Your Stocks May Be Overconcentrated

In many cases, stocks rise in groups, not just by themselves. For example, if Apple and Facebook are rising sharply, stocks like Microsoft and Google are likely not far behind. Whether it be tech stocks or energy stocks, healthcare stocks or utilities, stocks in a winning sector tend to move in a group. If most of your stocks are in a particular industry, your portfolio might very well be overweighted not just in terms of individual stocks, but in terms of a specific sector. In this case, while you might keep your overall percentage of stocks the same, you might consider reallocating the sectors within your portfolio.

Keep Reading: What $1,000 Invested In Stocks 10 Years Ago Would Be Worth Today

You Might Need To Protect Against Rising Interest Rates

The Fed has held interest rates artificially low throughout 2020 and 2021 in an effort to save the economy from falling into a deep recession triggered by the coronavirus pandemic. However, now that vaccinations are widespread and the economy is reopening, it’s inevitable that the Fed raises rates again at some point. That might not happen in 2021 or even 2022, but market interest rates are likely to trend up in anticipation of inflation-fighting moves from the Fed. If your portfolio is overweighted with stocks or bonds that benefit from falling rates, it might be a good time to rebalance your positions.

Check Out: Top Environmentally Friendly Companies To Invest In

Evaluate the Costs vs. the Benefits

Every time you rebalance, your portfolio may be susceptible to various costs. In addition to the commissions and taxes you might have to pay, you’re introducing the risk of opportunity cost into your portfolio. For example, if you trim some of the winners in your portfolio to reallocate that money to your losing positions, you’re reducing your exposure to the potential upside of those winners. A position that has grown from 5% to 8% of your portfolio, for example, might just be starting a big run.

Building Wealth

Over-rebalancing can act as a drag on your profits if it continually means reducing your positions in stocks that have momentum and are moving higher. But the opposite is also true. If you own a stock that has skyrocketed and now consumes 50% of your portfolio, that position clearly needs reallocation. And in the current market environment, you might indeed find that some of your positions are out of whack. In that case, the benefits of reallocation clearly outweigh the risks and costs.

More From GOBankingRates

Last updated: Aug. 3, 2021

About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.

Untitled design (1)
Close popup The GBR Closer icon

Sending you timely financial stories that you can bank on.

Sign up for our daily newsletter for the latest financial news and trending topics.

Loading...
Please enter an email.
Please enter a valid email address.
There was an unknown error. Please try again later.

For our full Privacy Policy, click here.