Imagine a situation where you were at the playground on the seesaw with your older brother. It works well at first. Then winter comes. The next spring you hop on the seesaw again, but it doesn’t work anymore. Your brother grew faster, and now the seesaw is out of balance. He gets on, you fly up on your side, and you’re stuck with your legs dangling in the air, suspended until he lets you down. Your seesaw is out of balance. You need to rebalance to make it work the right way again.
In the video, we talk about rebalancing your investment portfolio. Rebalancing is simply one form of investment discipline. Rebalancing implies that something is out of balance, and needs to be returned to its original state. It might go something like this: We meet with a client and discuss their hopes, fears, dreams, and resources. We agree on an appropriate mix of assets to address their situation. We initiate investments to match that asset allocation. Over time, some assets perform better than expected, some about as expected, and some worse than expected. As those realities take place, the asset allocation drifts away from the agreed upon allocation.
Rebalancing is the function of bringing that portfolio back to the originally agreed upon asset mix. This does two things for the client. First, it brings the desired risk/return profile back to where it was intended to be. Second, it adds a discipline to selling off some assets that have risen faster than expected and purchasing assets that have not done so well in order to restore the balance. In simple terms, rebalancing effectively forces the portfolio to sell high priced assets and buy low priced assets.
Of course, there is an issue of frequency. How often should rebalancing take place? In our opinion, it should not be daily, weekly, or monthly. That is generally too short a time-frame for any truly significant shifts to have occurred between asset classes.
Thanks for reading and watching.
Patrick Stoa
For questions, comments, and conversation, call us at 920-617-6830.
The discussion contained in this video is a hypothetical illustration and is not intended to reflect the actual performance of any particular security. Future performance cannot be guaranteed and investment yields will fluctuate with market conditions. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Re-balancing a non-retirement account could be a taxable event that may increase your tax liability.