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Why Rebalancing Your Portfolio Matters

In life, balance is everything — whether it's finding time between work and family or maintaining a healthy diet. The same goes for your investments. Keeping your financial portfolio balanced is a smart way to stay on track toward your long-term goals, even as the markets shift.

That's where portfolio rebalancing comes in. Rebalancing is the process of adjusting your investments — like stocks, bonds and cash — so they stay in the right mix for your needs. This mix, known as your asset allocation, is designed to reflect your comfort with risk, your investment goals and how long you have until you'll need to use the money for a major life event like retirement or the purchase of a new home.

For example, let's say your target portfolio is made up of 60% stocks, 30% bonds and 10% cash. Over time, as the value of each investment changes, your portfolio may become unbalanced. If stocks have a great year and rise in value, they could end up making up 70% of your portfolio. That means you're taking on more risk than you originally intended.

To get back to your 60/30/10 target, you would sell some stocks and possibly buy more bonds or cash investments. This helps bring your portfolio back in line with your goals.

Markets go up and down. That's normal — but it also means your portfolio can shift without your even touching it. If you don't rebalance regularly, you might be taking on too much (or too little) risk.

Rebalancing offers several benefits. It helps keep your investment plan on track and manages your exposure to risk. It also encourages disciplined decision-making, rather than chasing trends.

It might feel strange to sell investments that have been doing well and buy ones that haven't. But this strategy can help you "buy low and sell high," which is one of the key ideas behind successful investing.

You may be wondering how often you should rebalance your portfolio. There really is no one-size-fits-all answer. Some people rebalance once a year. Others do it more frequently based on how far their investments drift from their target percentages.

What's important is that you check your portfolio regularly — at least annually — and adjust when needed. After big market movements, whether up or down, it's a good idea to take a closer look.

Keep in mind that if you rebalance by selling investments in a taxable account, you might owe capital gains taxes. Also, some brokers charge fees for trades. But if you own similar investments in a retirement account like an IRA or 401(k), you can often rebalance without triggering taxes. A financial advisor can help you choose the best approach — and may even be able to help you avoid or reduce costs.

Your ideal investment mix will probably change as your life changes. Younger investors might favor stocks for growth. As you near retirement, you may want to focus more on income and stability. Rebalancing helps you adjust as your goals evolve.

Think of your portfolio like a car on a road trip — regular check-ins and small course corrections will help you stay on the right path. A financial advisor can help you design a strategy that keeps your investments aligned with your goals every step of the way.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor, Robert Farwell, CFP®, RICP®, at 858-514-8876. Edward Jones, Member SIPC

Edward Jones, its employees, and financial advisors cannot provide tax or legal advice. You should consult your attorney or qualified tax advisor regarding your situation.

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