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The Raffer Investment Group

The Importance of Re-balancing Your Investment Portfolio

The Importance Of Rebalancing Your Investment Portfolio

By Jeremy Raffer

Like many things in life, investing requires balance. It may be tempting to put all your money in risky investments or solely play it safe, but the truth is a mixture of investments can yield you the best results. To determine your investment goals, you have to ask yourself a few questions. What are you saving for? It can be for retirement, a vacation home, or paying for your kids college. What is your investing style? Take into account your age and tolerance for volatility. Everyone has a different life with their own individual goals and should have a custom portfolio to reflect that.


Table Of Contents:

The Issue

Risk and Diversification

Locking In Potential

Why Rebalancing is Necessary

Often enough you will start the year with an investment allocation goal and eventually stray from it. Let’s say you start off the year with 80% of your money invested in stocks and 20% in bonds. Throughout the year the market does well though, and by the end you’re at 85% invested in stocks and 15% in bonds. You had an ideal portfolio mix in mind, but the markets have shifted. So what should you do?


Unfortunately, most people’s decisions to buy and sell investments are based on emotion and not statistics. If you watch investor behavior you’ll see that people are hesitant to sell the investments that have done the best and anxious to get rid of the ones that have disappointed. Mathematically--as long as you hold well diversified investments--the proper strategy would be to sell some of what’s done best so you can capture those gains, and then buy more of what’s done poorly so that when they recover you reap the benefit.


This sounds great in theory, but in practice it’s very hard to do. To most it feels like you’re doubling down on your underperformers and getting rid of the ones that worked in the past. Nevertheless, rebalancing has shown to increase portfolio returns.  According to a Sigma Investing study, rebalancing increased returns by 1.5% annually over a 30 year period.  On a $1,000,000 portfolio that’s an extra $15,000 per year!


Control Risk and Diversify Through Rebalancing

Another reason to consider rebalancing is because of your risk profile. Let’s presume you’re retired or closing in on it. You have a 50-50 mixture of stocks and bonds specifically designed to provide enough growth to fund your retirement goals while keeping the volatility of your portfolio down to a tolerable level. Over time stocks have always performed better than bonds though, and if you never rebalanced, eventually your mixture would turn to 60% stocks and 40% bonds, and then 70/30, and so on. Somewhere along the way the market could dip and because of your overexposure to stocks your portfolio could suffer more than you’d ever intended. Rebalancing is a way for you to make sure that the risks you take don’t get out of control.


Well-diversified portfolios have exposure to domestic large, mid, small, and foreign investments. Each one of these will perform differently throughout the year depending on politics, the economy, and a slew of other factors.  Without a doubt, there’s going to be one that did the best and one that did the worst.  Like all investors, you’re going to wish you had more of what worked and less of what didn’t.  The catch is that no one knows what the optimal mixture is--no one has a crystal ball.  What we do know is that trying to chase the top earners is destined to disappoint. The below chart shows how a particular asset class can be a top performer one year and not the next.

stock market risk and diversification


Instead of trying to pick which asset class to be in, you have to remember diversification and balance; a diversified portfolio ensures that you have your eggs in multiple baskets--so to speak. Rebalancing also ensures that no single asset class or investment becomes out of line.  This creates the optimal environment where you participate when they do well and don’t suffer unnecessarily when they do poorly.


Locking Your Investment Gains Through Rebalancing

Another reason to rebalance regularly is to prevent hyper concentrations in individual positions. We all know someone who has half their portfolio in a single stock. The problem with this is twofold.  Firstly, once you achieve a concentration like this it can be extremely difficult to adjust your allocation without suffering from taxes. A sound strategy would be to rebalance regularly before the taxes build up to an unmanageable point. Secondly, allowing concentrations like this to develop creates an exaggerated risk in your portfolio. Just like the lottery, it isn’t your money until you cash the ticket; just because an investment has appreciated significantly, does not mean you’ve realized that gain.  Until you sell it, it’s just potential. So how do you lock in that potential? A strategy of rebalancing is a way to realize that potential every year and lock in those gains.


Diversifying your portfolio--despite market trends--will increase the chances you reach your personal investing goals. Rebalancing is a smart way to maximize returns as well--which is why it’s a crucial component of our asset management business. We consider it a essential part of our investment strategy and recommend you do the same for your portfolio.

For the reasons above we’ve made rebalancing a part of our asset management business. We consider it a essential part of investment strategy and recommend you do the same if you’re not already.

Learn more about our Investment and Asset Management services.


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Jeremy Raffer, MBA
Wealth Manager
Phone – 201-773-4641
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.

Any opinions are those of Jeremy Raffer and not necessarily those of Raymond James. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. All hypothetical examples are for illustrative purposes only. Any information shown above is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.