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The Importance of Rebalancing

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

There's been a lot written about the merits of buy-and-hold investing. Unfortunately, many investors are confused by the term and instead employ a buy-and-set-it-aside strategy. This can be a grave and costly error, as holdings can swing widely over time and tweaks are often necessary to bring a portfolio back in line with an investor's stated goals.

Maintaining a healthy portfolio is a lot like keeping your car or a household appliance in proper working order. You need to occasionally tinker with the parts in order to keep your portfolio running smoothly and efficiently.

Determining your target asset allocation is a good first step. How you allocate your assets is a very personal decision that will depend largely on your age, tolerance for risk and investment goals. For instance, someone nearing retirement might want to tone down the equity portion of his portfolio slightly to take a more conservative stance. On the other hand, given life expectancy increases, it may be in some clients' best interest to boost their stock holdings even more than has been traditionally suggested.

The next step, which is often overlooked, is to perform ongoing portfolio maintenance—to make sure your investments continue to align with your targeted allocation. Markets move up and down, asset classes perform differently over time and particular investments go in and out of favor. The geo-political landscape can also strongly impact portfolios.

Even normal gyrations in stock and bond markets can cause the balance in your portfolio to shift significantly from your previously established target. So for instance, a portfolio that was initially 80 percent stocks and 20 percent bonds could easily shift over time to be 70 percent stocks and 30 percent bonds. Conversely, the portfolio could shift to 90 percent stocks and 10 percent bonds.

That's why, even when employing a buy-and-hold strategy, it's important to adjust your asset allocation at least once a year—possibly more often—depending on the circumstances. We call this process rebalancing, and it means buying or selling certain stocks, mutual funds or other investments in order to maintain your established asset allocation. It can be critical to successful investing over time.

With a buy-and-hold strategy, you don't have to worry about rebalancing every day, week or even month. But it is good to assess your portfolio a few times a year to make sure you are within the range of where you want to be. If you find at these checkpoints that your allocation has strayed more than 5 percent from your target, it may make sense to make certain modifications—especially if the investments are in tax-deferred vehicles such as a 401(k) or IRA. This helps reduce risk and ensures you don't becoming overly concentrated in one area or another and that you are able to benefit from growth opportunities where appropriate.

Buy-and-hold doesn't mean buy-and-forget. Investing is an ongoing processing, and at Align, we can help you determine the right balance for your personal situation. Please don't hesitate to contact us so we can work with you to craft a well-balanced portfolio that's tailored to your individual needs.