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Sunday, April 21, 2024

How rebalancing my portfolio helps protect my money

How rebalancing my portfolio helps protect my money

05.05.2023

You know investing plays an integral role in your financial future, but are you doing enough to help protect your money from swings in the market? When it comes to investing, many people opt for a hands-off approach. In many ways, that makes sense. Investing over the long term has generated wealth for a lot of people. But if you’re not rebalancing your portfolio, your approach to investing might be too hands off.

You’ve likely heard people talk about rebalancing, calculating percentages, and crunching weights of asset classes. Maybe it’s felt too complicated or you didn’t think your net worth was high enough to worry about portfolio rebalancing.

The truth is portfolio rebalancing can be much simpler than it seems, and it can play a key role in helping to grow your net worth.

Let’s explore what rebalancing your portfolio actually means and dig into some portfolio rebalancing strategies that might help you build and protect your family wealth and your retirement.

What does rebalancing your portfolio mean?

Before you think about rebalancing portfolio strategies, you need to know what it means to rebalance your portfolio.

Think about rebalancing a portfolio like an alignment for your car–or your spine! When roads (or life!) send us bouncing along, we take our cars and our bodies in for an alignment.

The same thing  can be true for your portfolio. As the market ebbs and flows, your investments may start to shift. For instance, that might mean that the value of your bonds increase and maybe some of your equities drop.

Those bumps can jostle the overall balance of your portfolio. In the earlier example, when your bonds grow, your portfolio becomes more conservative than you originally intended. So when you rebalance your portfolio, you shift things around to ensure that your investments stay aligned with your risk tolerance and investing goals.

Why is it important to rebalance your portfolio?

You can certainly keep driving for some time without an alignment, you can also keep investing without rebalancing. But you  may not want to!

Investing in different assets can lead to different outcomes. Someone who is looking for maximum portfolio growth over several decades is going to have a different portfolio makeup than someone who only has a short time horizon and needs to be more conservative with their risk.

If you don’t rebalance your portfolio, it can drift away from your goals and away from your risk tolerance. Your money will stay invested, but not in a way that aligns with your values. To optimize the way your money works for you, consider rebalancing your portfolio regularly.

Portfolio rebalancing strategies

When you’re ready to rebalance, consider implementing one of these portfolio rebalancing strategies.

Schedule a time

One portfolio rebalancing strategy suggests that investors schedule regular intervals to rebalance. Perhaps once a year or maybe even once a quarter. While many financial strategists recommend rebalancing regularly, for individuals managing their own portfolios it isn’t realistic or necessary to be acting too frequently.

When you decide on an interval that suits your investing strategy, put it on your calendar and add it to one of your net worth review sessions.

Apply the 5/25 rule

A solid rule of thumb is the 5/25 rule from Larry Swedroe.1 When an asset class shifts from its original target by 5%, you should rebalance it.

Let’s imagine that your portfolio is originally 80% stocks. But then, the actual value shifts to 75% or 85% of your portfolio makeup. Since your investment makeup moved by 5%, you would rebalance your portfolio.

But what happens when your portfolio only gives a small percentage to a certain asset class? Maybe you want to keep 5% of your portfolio in emerging markets or international bonds. You wouldn’t wait for the value to hit 0% before adjusting your portfolio. Instead, you use the “relative 25” portion of the 5/25 rule. If that value drops to 3.75% or bubbles up to 6.25%, that asset moves a relative 25% from its original target. In that case, you would also rebalance.

Use the Investment Check Up Tool

If rebalancing a portfolio gives you flashbacks to your high school calculus class, it’s not actually that complicated.

In fact, you can use Empower’s Investment Check Up tool to get a free analysis of your portfolio to see how well it matches your risk tolerance and goals. This tool can be especially helpful as your investing goals change, your timeline shifts, or your risk tolerance adjusts.

How rebalancing your portfolio supports a healthy retirement

Rebalancing your portfolio can help with every step of your journey toward retirement and later in retirement itself.

As your time horizon changes, your portfolio should too. Whether you’re working toward a traditional retirement age or have a goal of retiring early, your portfolio is likely going to initially focus on growing your assets. However, as you move closer to retirement, your portfolio needs may change.

Rebalancing the asset allocation can help you transition from growing your assets to preserving your nest egg.

When you cross the finish line and finally retire from work, that doesn’t mean you should retire from portfolio rebalancing. Instead, you want to continue to rebalance to help ensure that you manage your risk and keep working toward your goals.

Final thoughts

Portfolio rebalancing is an important part of investing that is sometimes overlooked. Perhaps it felt too complicated or you worried that your net worth wasn’t high enough for rebalancing your portfolio to benefit you.

Virtually all investors benefit from portfolio rebalancing. One  tool to help with portfolio rebalancing is to use Empower’s Investment Check Up tool. Then, you can rest assured that your portfolio is set up to help you achieve your family’s financial goals.

 

1 A Wealth of Common Sense, “The Larry Swedroe 5/25 Rule,” March 29, 2014.

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Andy Hill, AFC®

Contributor

Andy Hill, AFC®, is the award-winning family finance coach behind Marriage, Kids, and Money, a platform dedicated to helping young families build wealth and happiness.

Author is not a client of Empower Advisory Group, LLC, and is compensated as a freelance writer.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. No part of this blog, nor the links contained therein is a solicitation or offer to sell securities. Compensation for freelance contributions not to exceed $1,250. Third-party data is obtained from sources believed to be reliable; however, Empower cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third-party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Empower of the contents on such third-party websites. 

Certain sections of this blog may contain forward-looking statements that are based on our reasonable expectations, estimates, projections and assumptions. Past performance is not a guarantee of future return, nor is it indicative of future performance. Investing involves risk. The value of your investment will fluctuate and you may lose money. 

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. 

Advisory services are provided for a fee by Empower Advisory Group, LLC (“EAG”). EAG is a registered investment adviser with the Securities and Exchange Commission (“SEC”) and subsidiary of Empower Annuity Insurance Company of America. Registration does not imply a certain level of skill or training.

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