Rebalancing your stock portfolio is essential for meeting your financial goals. It also helps you diversify your portfolio, protecting your money and helping it grow.
However, you may feel confused about how often you should rebalance your stock portfolio.
You should rebalance your stock portfolio following set dates or when your assets change a predetermined amount. Most people make adjustments quarterly or annually. In contrast, other investors change their portfolio by a set percentage when it grows. Both of these methods work well.
You must understand more about rebalancing a stock portfolio so that you can make the correct changes. In the article below, I’ll go over rebalancing and those two main methods for determining when to do it.
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Tips on Rebalancing Your Stock Portfolio
There are two main conditions that people choose to know when to rebalance their portfolio. You can do it by a specific time frame or when your asset allocation (how you split the funds in your portfolio) reaches a certain percentage. Some investors even combine the two!
The more often you check on your stock portfolio, the more stressed you’ll feel! It’s better not to check because you wouldn’t want to pull out your money.
Instead, please choose one of the two main conditions for rebalancing and only do it when the stocks meet that condition.
Rebalance Your Stock Portfolio When a Set Date Arrives
First, you can choose a set date to rebalance your portfolio. Rebalancing after paying taxes is a common time for investors. However, you can do it monthly, quarterly, or annually.
Some investors believe that annual rebalancing allows too much time for asset allocations to change. Most benefit from quarterly rebalancing the most.
You won’t have to pay as much in transaction fees, and your portfolio shouldn’t be too unbalanced at that point. It’s an excellent in-between time to make any changes you need.
However, there aren’t significant differences in risk between rebalancing monthly, quarterly, and annually. So you can choose the option that’s best for you!
Ensure that you account for fees so you don’t accidentally spend more than you earned.
Check if Your Asset Allocation Has Grown to a Certain Amount
Next, a more hands-on approach is rebalancing when your account grows a certain percentage. You’ll need to keep a close on the asset allocation of your stock portfolio.
When one changes by 5% or more, it’s a good idea to rebalance. This method is often best for more investors. Your portfolio can change more than you want it to during the year, meaning the set date could be too late.
However, this method isn’t for everyone. It’s a lot more involved and requires closely watching all of your accounts. Those approaching retirement ages are more likely to use this risk management strategy.
What is Rebalancing a Portfolio?
Rebalancing a portfolio is when you adjust your investments. You move around assets to return to your desired portfolio balances. Portfolios can slowly unbalance, as some parts grow (or shrink) faster than others.
Your portfolio should consist of many different assets, including mutual funds, stocks, and bonds. Investors choose what they want in their portfolio based on their own risk tolerances.
Each asset has different returns and losses, so your portfolio can change significantly over time. Because of this, it’s essential to move your money around from time to time.
You can adjust your portfolio to have the proper proportions again—think of it as regular maintenance! Lastly, don’t rebalance unless you need to.
You can incur transaction costs, which add up over time!
Rebalancing Ensures You Invest More Strategically
Rebalancing your stock portfolio is very important. Many investors make the mistake of keeping money in an asset that outperformed.
Asset allocation has to do with risk—you don’t want to leave a significant portion of your money in a single asset! Diversifying your portfolio is an important step you can take to manage your money better.
Rebalancing even gives you the chance to review how your portfolio is doing. You need to be somewhat active in managing your portfolio to meet your goals—rebalancing allows you to see what changes you need to make and where.
If you’ve never rebalanced your investment portfolio, it can become volatile and unpredictable. You could expose yourself to more risk! But overall, rebalancing is essential.
You’ll want to figure out when to rebalance it and do so on a frequency that’s best for you.
How to Rebalance Your Stock Portfolio
You can do the rebalancing on your own to avoid some of the fees. You’d need to sell assets while buying others. However, you need to review your portfolio first to confirm where the money needs to come from and go.
You’ll need to realign your portfolio with your preferred asset allocation percentages. When you set out with this portfolio, you should’ve had a goal in mind—try to return your assets to that state.
Overall, you want to keep your money balanced and in the correct places. You must avoid overtrading, which is risky and can be costly. Today, many online brokers rebalance for you automatically, so you don’t have to worry about selling and buying assets.
This option is preferable for those who don’t want to trade their stock actively. In short, rebalancing involves moving money in your portfolio by selling then buying stock.
You should do so in a way that creates your ideal asset allocation so that you can meet all of your financial goals.
To summarize, you’ll need to set a condition for rebalancing in advance. This condition could be a certain amount of time has passed or that your target asset allocation moved by a certain percentage.
You’ll want to choose a frequency that works the best for you without letting it go too long. Rebalancing is essential for maintaining a strong stock portfolio and meeting your money goals.
However, doing it too often can get you transaction fees. It’s best to find a nice balance, but everyone has a different time for it.
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I'm Donny. I'm a world traveler, investor, entrepreneur, and online marketing aficionado who has a big appetite to compete and disrupt big markets. I thrive on being able to create things that impact change, difficult challenges, and being able to add value in negative situations.