Rebalancing Your Portfolio

As time progress, asset values continue increase or decrease, and new cash, for future investments is continually added to your portfolio. It’s a good idea to consider rebalancing your portfolio, changing your asset allocation if necessary.

Let’s use the stock market, and a stock brokerage account for example. Consider the difference between brokerage accounts that hold the following.

100% invested into stocks, 0% cash

75% stocks, 25% cash

50% stocks, 50% cash

25% stocks, 75% cash

0% stocks, 100% cash.

When there has been a bear market for an extended period of time, the market is low, the stock prices are cheaper, and thus generally, less risky, as there is more potentially to gain. You may consider going more aggressively into the market, and allocating your portfolio, 75% into stocks, and holding 25% in cash.

You could also consider going 100% into stocks, and retaining 0% cash on hand. This would be the most aggressive and invested portfolio. It’ll be tremendous if it goes up, and if it goes down further, you won’t have any additional cash to invest to ride it back up.

Or maybe the stock market is up, you are fully invested into stocks at 100%, with no cash on hand. You made a lot of money and road the bull market up. Feeling it may be too high, you could consider reducing stocks to 50%, and having 50% cash on hand, or even further to 25% stocks, and 75% cash. Holding on to at least some stocks, because you don’t know if it still has more to run up or not. Rebalancing your portfolio to have a higher percentage of cash would require you to sell more stocks, or add a bunch more cash to offset it.

The important point to understand, is to consider rebalancing your portfolio as the market changes, and your asset values change. It’s important to not forget it entirely, check back up on it, and see if your asset allocations feel right to you, based on where we are today.

If you do what we recommend, automating cash transfers to your account, you should always have more cash being added. There are many things you can consider rebalancing, cash & stocks was just an example, but there are others, like restructuring what stocks you have. Maybe some stocks are too risky now, and you want less risky, you can change that allocation as well within your invested stocks. Maybe one stock has jumped up in a huge value, and now it too much of your portfolio.

Ideally, think about your wealth holistically, and rebalance your entire investment portfolio. You can also use real estate and a variety of other assets. The stock market is high, and you feel like real estate may be a safer bet. Exchange your stock assets for real estate, and hold onto that. Maybe you think cryptocurrencies are the next biggest thing, allocate some into that. Restructure, restructure based on what you feel is best.

Stocks rise in value quicker than real estate, but it’s a lot more volatile, when we had large gains in stocks, a lot of people like to reallocate the profits to long-term, more stable real estate.

Maybe you think you have too many real estate buildings in one area that is at risk, consider restructuring which assets you have and exchanging them for different ones. Interest rates low, maybe you want to restructure your debt and lock in better rates. Think about all of the pieces in your portfolio, and how you may want to rebalance them as time moves on.

We are not recommending just to sell or buy because the market is high or low, it’s something to consider, and there are always so many factors at stake to determine what’s best for you and your family.