Rebalancing Your Portfolio: Why Do That?

By Jon L. Ten Haagen, CFP ®

Let’s talk about the markets in 2017. The Dow Jones Index was up about 5,000 points. It advanced by 25 percent, making it the best year since 2013. The Dow took 14 years to climb from 10,000 to 15,000, then took only 3.5 years to get to 20,000. On top of that, the S&P500 and the NASDAQ indexes climbed 19 percent and 28 percent respectively.

These increases were created by good economic growth, sweeping tax changes and better than normal corporate profits. This ‘bull market’ is nine years old and the second strongest in history. Consumer confidence is at a 17-year high.

Market fluctuations are what we have experienced since the start of 2018. January gave us the fastest 1000 point gain ever and February took it all back. The pundits were spouting about the day the DOW moved down 1400-1500 points. That sounds ominous, yet if they had reported that the Dow had dropped by 4.2 percent that day, it would not sound so scary. They were not talking so loudly when the market gained the same 1000-1100 points back in a matter of days. Please remember, it is not timing the markets, but time in the markets. Market corrections occur. When will the next one get here? No one knows, but it will happen. Rebalancing periodically helps cushion the negative.

If you started out 2017 with a balanced portfolio of 60 percent in equity (growth investment vehicles) and 40 percent in fixed income (investments aimed at generating income and therefore less volatility), I would strongly suggest that your portfolio is now out of balance since the equity markets have been so strong and the fixed income markets have been softened by interest rates rising. At the end of 2017 I assure you your portfolio was out of kilter. Most likely too much equity and not enough fixed income. If a correction comes along – and it will come along one day you should be prepared.

Whether you are just starting out in your adult life entering your first job, or you are half way to retirement and even if you are into retirement, you should be paying attention to your portfolio balances. We all need equity for growth to keep up with inflation but you do not want too much of your portfolio on that side of the equation. While looking at the correct balance of your portfolios you also have to take into account your investment horizons and goals. Are they the same as a year or five years ago?

What is rebalancing? It’s the process of realigning the weightings of a portfolio of assets. You should have growth, growth and income, equity income, balanced, alternatives and bond positions to adjust as needed. Each of us is comfortable with a different percentage of these investments. If you do not have the desire, inclination or even time to pay attention on a regular basis you should seriously consider working with a qualified Certified Financial Planner. This is your serious money aimed for your comfortable retirement. Pay attention to what it is doing.

There is no specific timetable for you to rebalance. I suggest a strong review once a year, along with checking your beneficiary designations and your insurance coverages. There is no specific rule to having to rebalance if the markets have not moved much, but it is better to review than not. Rebalancing also gives you the opportunity to sell high and buy low, taking advantage of market fluctuations.

I hope this makes sense to you and if you would like to discuss this concept or any other parts of your retirement investing or estate needs please feel free to reach out to us.