The Importance of Portfolio Rebalancing

Here is something retirees ignore at their peril: portfolio rebalancing, a simple technique that calls for periodically skimming profits from winners and plowing the proceeds into losers.

Rebalancing is a good idea at any age. It reduces risk by preventing overexposure to stocks and instills good habits by building the discipline to stick to a long-term financial plan.

However, in retirement, the utility of rebalancing can have an even greater effect than in the accumulation phase of your financial life.  

In the 2-3 years leading up to and in retirement, your attitude for risk is most likely at its most sensitive state, as a sharp decline in your portfolio can have long lasting and debilitating effects.

With stocks near all-time highs, now is a perfect time to revisit your rebalancing strategy or to put one in place so that you and your portfolio can handle whatever the market throw at you.

Over long periods of time non-rebalancers are often rewarded because as stocks rise so does their overall allocation to stocks, and over the long-term stocks will outperform bonds.  But there is still a large amount of risk in a non-rebalanced portfolio that is not ideal for retirees who need to draw on their investments for income.

For a portfolio that was 60% stocks and 40% bonds 5 years ago and never rebalanced the allocation would currently sit at about 72% stocks and 28% bonds.  If there were a market correction and your portfolio was 12% more risky than you intended it to be, would you be able to ride out a market decline?

Having a rebalancing strategy allows you to be a disciplined investor, periodically selling winners when they are at their highest, and buying losers when they are low, which is what every investor is trying to do. 

It’s incredibly important to have your portfolio “balanced” to your risk tolerance so that you can stay in the game when markets are down and survive to see new all-time highs.  

If you and your life savings are being ignored or feeling taken advantage of, come join our family.  We are a family-owned financial planning and investment firm who promise to treat you like family.  No products.  No hard sell.  No gimmicks.  Just honest advice based on four decades of experience.