Is it time to rebalance? (Article)

Is it time to rebalance?

Good market returns in 2021 have started to cool off lately. It is possible that this run up in stock funds may have knocked your original asset allocation strategy off balance. When this happens, you may be exposed to more risk than you had intended. You can easily restore your initial asset allocation by rebalancing.

Rebalancing is returning the balance in each fund back to the original mix. Let’s say that you selected a mix of 10% in ten funds. If one or two funds experience greater returns, the balance in those funds will drift away from your initial allocation, with each fund making up perhaps, 12 or 13% of your account value. This means that recent slower performers, like bonds, make up a lesser percentage of your portfolio. This disrupts your overall ratio of stocks to bonds. More stocks and less bonds means taking on more risk.

Now, don’t get us wrong; we’re happy for those outperformers. But remember, any given fund doesn’t outperform all the time. By rebalancing, you realign your balances back to the initial mix, which sells some of the investments that have done well while you still have gains. This may indeed sound counter-intuitive, but remember, the classic formula for investment success: buy low, sell high. It also restores your initial asset allocation back to the target you’ve set, based on your risk tolerance and time horizon.

Keep in mind that if your account is entirely invested in the pre-mixed target date funds, no rebalancing is needed. The fund managers take care of that for you. Also, if you are rebalancing accounts that are not tax deferred, you may be setting yourself up for a tax bill. In that case you may want to seek the advice of your financial or tax advisor.

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