Over time, you might start to see your portfolio asset-allocation veer off track because of market ups and downs. Market variation could cause the performance of an individual stock to improve, while other stocks either remain consistent or actually start to decline in performance during a certain period of time.
To give an example of what this might look like, let’s say you started with a simple 50/50 portfolio mix. Variation across the market could cause your 50/50 portfolio mix to become more unbalanced over time. After 30 years of unpredictable variation, and without strategic rebalancing, your portfolio could look more like a 70/30 split.
That might sound like quite a jump, but it’s not impossible especially given enough time.
And, not only could your portfolio’s allocation change, but the amount of inherent risk within your portfolio can also change. But, if your goals or risk tolerance have not changed drastically, it’s likely that your asset-allocation wouldn’t need to change too much, either to maintain balance in your portfolio.
Most of us tend to think about these changes occurring over long periods of time. Keep in mind that while small market movements in the long-term can shift your portfolio’s allocation, markets can sometimes move significantly over a short period of time. This, in turn, can cause your asset-allocation to fall out of balance rather quickly.
Advantages of Portfolio Rebalancing
But why would anyone want to sell investments that have done great in order to purchase those that haven’t seen a significant upturn? While rebalancing might seem odd at first, it is all about risk control.
If more and more of your total portfolio winds up in one investment, you could risk losing a lot should that investment stumble. This practice of pruning your high performing investments and reallocating those dollars to buy more of the asset classes who haven’t performed as well is known as rebalancing.
Rebalancing is a systematic, disciplined process that can also help remove emotion from the investment process. Ally’s rebalancing software scans our clients’ portfolios on a daily basis for opportunities to rebalance, and better yet there’s no additional transaction cost to you, the customer.