If you have a successful investment, you may want to stick with it. But over time, its performance can shift a portfolio’s intent and its risk profile, sometimes referred to as “risk creep.” In other words, if your investment has varying returns over time, the portfolio may bear little resemblance to its original allocation.
There are two ways to rebalance a portfolio.
The first is to use new money by allocating new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Asset allocation and diversification are investment principles designed to manage risk. However, they do not guarantee against a loss.
The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.
Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of market conditions. Consider setting a specific time each year to schedule an appointment with one of our financial advisors to review your portfolio and determine if adjustments are appropriate.