April 9, 2020 Update: When Markets are Moving, Think Rebalancing

Beth Misak |

Considering how much markets have fluctuated over the past month, now could be an opportune time to rebalance. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. So let’s review the basics.

An investment portfolio starts out with a certain targeted mix, or balance of investments. At the onset, the portfolio is in close alignment with the target mix. Over time the mix will likely change due to the various returns of each investment. In turn, the mix can drift away from the original target. Putting the investments back in their original alignment is the essence of rebalancing.

There are several benefits to rebalancing investment portfolios. One key benefit is that by maintaining the original alignment, the portfolio retains the intended risk and profile.

For example, say a portfolio starts with 50% stocks and 50% bonds. Over time, the stocks might have a higher return than the bonds. Suppose that has shifted the portfolio mix to 60% stocks and 40% bonds. It’s now a higher risk portfolio than originally intended; the stocks now constitute more than 50% of the portfolio’s value. The portfolio can then be rebalanced by selling some stocks and buying more bonds.

A well-known saying is, “buy low, sell high.” Another benefit of rebalancing is that it’s a way to enforce the discipline of buying low and selling high.

For example, consider a portfolio that contains 20% each in five different investments. In the first year, suppose investment X had a relatively higher return than the others. At the end of the year, X might account for more than 20% of the total. On the other hand, suppose investment Y had a relatively lower return than the others. It might account for less than 20% of the total.

Rebalancing the portfolio means that you would sell some of X (sell high) and buy some of Y (buy low). Rebalancing an investment portfolio seems sensible for maintaining intended risk profile and enforcing a buy and sell discipline. A portfolio should be examined for rebalancing opportunities at least once per year in order to seek to capture the related benefits. Taxes and trading costs should be considered before taking any actions. Still, rebalancing can help keep the right balance in an investment portfolio.

In these tumultuous times, HearthStone has been monitoring opportunities to rebalance and taken appropriate action on a case-by-case basis. Please let us know if you have any questions or concerns.

Paul Hynes, CFP®
President and CEO