The Importance of Rebalancing

Jun 2, 2022 | Getting Started, Investing, Saving & Investing

Each spring as the weather turns nice, flowers bloom and yards begin to turn green. This culmination is wonderful to look at and it is enjoyable admiring the end result. However, like most things in life, behind a fantastic result is a great deal of planning and work that are never seen by people on the outside.

The maintenance and management of your investment portfolio shares many similarities with maintaining the “best lawn on the block.” If you take diligent care of your lawn, adhere to a structured schedule, use the right products for your local climate, invest the necessary (although lengthy) time, and get professional advice you can find yourself the envy of the neighborhood. However, many times life can get in the way.  Between your career, family, kids and day to day life, there are plenty of roadblocks that can arise.  As life happens, we often begin to miss the key maintenance items.  Whether we forget to mow, dethatch the lawn, remove weeds, apply grass seed, or fertilize, your lawn can get out of hand creating a lot of work to bring back the lawn to its original vibrant life.  Proper management of an investment portfolio can result in the “best lawn on the block” as well but without they key maintenance done at the proper times, your portfolio can get out of control in a hurry.  

A properly constructed investment portfolio will be built based upon your risk tolerance.  This will drive how much of your portfolio should be invested in growth-oriented investments versus more conservative investments.  Over time, riskier growth investments will outpace their conservative counterparts. As a result, the growth portion of your investment portfolio will become a larger percentage of your overall holdings, exposing you to more risk than you are comfortable taking.

Let’s look at an example. Let’s assume that in 2009 your financial plan called for a portfolio comprised of 60% stocks and 40% bonds. Now let’s fast forward time 13 years ahead to the year 2022. Due to market movement, your once balanced portfolio of 60% stocks and 40% bonds would now carry a weighting of 86% stocks and 14% bonds. At this new stock to bond weighting, your portfolio would have significantly more risk than you originally intended, exposing you to much more downside. As you can see, much like our yard, if we do not do the proper maintenance on a disciplined schedule we can be in for a lot of trouble.

Now that we understand how vital proper maintenance is to our investment portfolio, the questions become: What is the proper maintenance? How often do I perform the maintenance? At what intervals do I execute this strategy? Wow- lawns and portfolio management take a lot of work but let’s discuss how to use rebalancing to maintain your investment portfolio. 

Rebalancing is accomplished by selling the investments that have grown to a level that exceeds their target allocation.  With the proceeds from the sales, an investor will buy more of the investments that have decreased in value bringing the overall weighting back to the original target allocation.  Through the rebalancing process, you are buying investments that have gone down in value (“buy low”) and selling investments that have gone up in value (“sell high”). This strategic buying and selling allows you to mitigate risk, lock in gains, and continue alignment with your long-term plan so that your portfolio can stay balanced and continue being the “best lawn on the block.”

Market movement can lead investors to make emotional decisions. This is another reason why rebalancing is paramount to success. It is crucial to have a strategy that is based upon a repeatable and disciplined process. If your rebalancing strategy is not performed often enough it can lead to missed opportunities and undesired outcomes. However, having a plan that rebalances too often can be time consuming and lead to emotional decisions thus negatively impacting your portfolio’s construction and returns.

There are two key elements that are necessary in a proper rebalancing strategy. The first component is rebalancing the portfolio to maintain your desired asset allocation. Just like you may mow your lawn weekly, it is a good rule of thumb to rebalance your portfolio quarterly. The second component is to revisit your entire strategy annually. Your annual review should include your goals, risk tolerance, and changes in your personal situation. Upon completion of this review, you will either decide to keep your targets the same or to adjust accordingly. 

 Typically, the neighbors who use a professional and reputable lawn care company tend to have the nicest lawns. It is because professionals have a set schedule that rarely deviates, take the time to understand the proper products to use, know what to do when the weather changes, and use their experience to make adjustments when needed. The same holds true for using a professional and reputable investment advisor for your portfolio. A professional wealth advisor should rebalance on a disciplined schedule, understand the universe of investments available, navigate changes in the market environment, and adjust when needed. 

As much as people would love to have an impressive yard, what they truly need is their portfolio to be the standout. Like most things in life, it takes a great deal of time and expertise to maintain the repeatable and disciplined process necessary for success. To learn more about creating a customized portfolio based upon your personal situation that is rebalanced in a proper and effective manner, please reach out to a GreenUp Wealth Advisor and learn how GreenUp can help you maintain the “best lawn on the block.”

Author

  • Tony Marquez, CFP®

    Senior Vice President | Wealth Advisor | Kansas City -- Tony is a Certified Financial Planner and has his master’s degree in Finance. Tony strives to be the expert, resource, and advocate that clients deserve when navigating a complex financial world. Prior to joining GreenUp Wealth Management in October of 2021, Tony worked as a Financial Advisor for a large financial services firm. There, he gained expertise in a variety of areas including financial planning, social security and retirement income strategies, college savings, and investment management.

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