Have You Always Skipped Rebalancing Your Portfolio? Big Mistake!

All you have to do is bring up the words "balancing your portfolio" and it brings about a pretty good snoozefest. It's akin to painting walls, balancing your checkbook (does anyone still do that anymore, besides my mom?) and/or running… unless you like to do all those things. (I don't.)

However, no matter how much you dread it, rebalancing can signal the death knell for your long-term financial goals if you skip it altogether. Let's explore some of the reasons you're avoiding it head-on and give you some tricks to make rebalancing more palatable. (Promise!)

What is Rebalancing?

First of all, what the heck'm I talking about?

When you rebalance your portfolio, you realign the proportions of your assets. You restore the equilibrium between what your original asset allocation was and put it back into balance. It's exactly like rotating the tires on your car.

Still murky?

Okay. When you allocate your assets, let's say you originally planned to have 90% of your portfolio in stocks and 10% in bonds. Over time, these allocations might get out of whack. The stocks might swell and the bond market might dip. This means that the bonds in your portfolio would have even less weight. 

You might choose to sell some stocks and get your portfolio back to its original 90/10 allocation. Rebalancing shifts your investment account to maintain a balanced portfolio over time. 

Why Rebalance?

Rebalancing gives you an opportunity to sell high and buy low. You can take gains, then reinvest in funds that haven't experienced highs. When one piece of the puzzle goes up, take profits from time to time to keep everything in a state of equilibrium. 

Think like a tightrope walker. You want to keep everything at your original allocated percentages so your intended performance actually carries through your long-term investing horizon.

Reasons People Avoid Rebalancing

When I avoid doing something, it's usually because it's hard. I usually have to examine the underlying reasons why I just… can't… launch. Let's take a look at the reasons why you might avoid rebalancing so you can check yourself. If you've been avoiding it, it's okay. Console yourself, then turn your attention back to rebalancing. 

Reason 1: It's boring. 

Buying stocks is exciting. Rebalancing, not so much. However, remind yourself that things like power washing the deck and vacuuming your cars — while boring — feel pretty good once you've actually tackled them. You'll feel the same way about rebalancing. I promise!

Reason 2: You might not understand it. (Avoidance is easier.)

Remember that you don't have to go it alone. Ask your financial advisor for help if you don't feel comfortable doing the kind of research you need to do in order to rebalance. Ask your financial advisor on the best techniques to buy low and sell high for optimal performance. 

In addition, most robo-advisors do the work of rebalancing for you — you can set up the feature fairly seamlessly. 

Reason 3: You don't know when to do it.

Let's say you know your target asset allocation and have set your mission to balance your portfolio. You might wonder how often you need to approach this onerous task. Two simple choices:

1. You can either rebalance your portfolio every year.
2. You rebalance when you notice your portfolio has started looking like your neighbor's deflated tires. 

Understandably, you might feel conflicted about rebalancing in the first place because there's actually no right or wrong answer as to when you "should'' or "shouldn't" rebalance. It's enough to keep you glued to your couch. Stick to it once a year and you're good to go.

Reason 4: You're worried you won't do it "right."

Ahhhhh, the reason I avoid doing everything. It's the reason the grass still isn't seeded in the backyard after building our home — because the last time we tried to seed it, the sun baked the tiny baby grasslings. Now we're scared to plant a yard! (I know, I swear… the things we do to get in our own way sometimes…)

However. The antidote to fear is action. Do it, mess it up the first time (a little bit), then get back on the train. You can do this.

Steps to Rebalancing Like a Pro

Take these steps so you can rebalance your portfolio on your phone as you rummage around in the fridge for a snack. Yesssss…. It's that easy.

Step 1: Before you freak out, find out if you need to rebalance.

Ray of sunshine for those of you who have been reading this article and getting fidgety and/or nervous: You don't have to rebalance if:

• You hold your money in a target date retirement fund or another fund that does the hard work of rebalancing for you.
• You keep your money in a robo-advisor like Wealthfront — again, it does the work for you.
• Your financial advisor will rebalance for you. (However, just make sure it's happening.)

Step 2: Choose the right asset allocation. 

Are you comfortable with riskier investments or do you prefer to invest more conservatively? Even if you're the same age, your neighbor, Harry, might have a completely different allocation than you. He might have a 50/50 stock/bond allocation, whereas yours might be 70/30. conservatively, Vanguard returned an ideal allocation of 50% stocks and 50% bonds. Make sure your asset allocation matches your long-term investing horizon. It could change as you grow older, so make sure the allocation you're aiming for still makes sense.

Step 3: Check out your online dashboard.

Your investment accounts will baldly display your asset allocation on an online dashboard. If you can't find your allocation, reach out to your online advisor to determine your allocation.

If you're aiming for, say, 50/50 and it looks like 70/30, you know you've got some work to do. 

3. Buy and sell shares to balance your portfolio. 

This step involves selling off overweighted investments and buying investments in asset classes you want to increase.

Let's say you own two index funds. A stock and a bond index fund. You want to aim for an equal split between the two, but right now, based on returns, your stock fund is at 55% and your bond fund is at 45%. 

You'll want to direct additional money to your bond investments to bring your portfolio back into the even 50/50 split balance. 

Don't Skip Rebalancing

What happens if you don't rebalance? You'll wind up with assets that don't match your risk tolerance as a whole.

If you're not interested in doing this at all, choose funds that rebalance automatically or ask a financial advisor for advice. No matter what, don't neglect this important step in monitoring your finances.