Rebalance Your Portfolio Successfully in a High-Market Environment

Establishing a target asset allocation is a vital step in building a successful investment portfolio. Yet, market fluctuations can alter your intended mix of stocks, bonds, and cash over time. This necessitates a strategic approach to rebalance your portfolio successfully in a high-market environment.

Understanding Portfolio Rebalancing

Rebalancing involves adjusting your asset mix to maintain alignment with your original allocation. For instance, in a bull market, your exposure to equities might surpass your planned allocation. Conversely, a market downturn may result in heavier reliance on bonds. The goal of rebalancing is to sell assets that have appreciated significantly and reinvest the proceeds in underperforming assets.

Why Rebalance?

While rebalancing may not always enhance returns, it plays a crucial role in mitigating risk. Maintaining a balanced portfolio is essential to prevent the risk profile from becoming too aggressive, particularly as market conditions change.

When and How to Rebalance

If you have not rebalanced in a while, your portfolio could be unbalanced. For instance, a portfolio initially allocated at 60% stocks and 40% bonds a decade ago could now reflect over 80% in stocks due to historical compounded equity returns exceeding 14% annually.

• Equities vs. Fixed Income: Check whether your portfolio has too high an allocation in equities.
• International Exposure: Aim to keep about one-third of your equity exposure outside the U.S.
• Growth vs. Value Stocks: Be aware that growth stocks have substantially outperformed value stocks recently.
• Specialized Assets: Analyze whether investments in areas like gold or cryptocurrencies exceed your target weights.

Strategies for Effective Rebalancing

Making adjustments doesn’t require changing every account you own. Focus on the overall portfolio’s asset mix, which impacts overall performance and risk. Consider these tactics when rebalancing:

• Tax-Deferred Accounts: Adjustments within accounts like IRAs or 401(k) are most tax-efficient, as they do not trigger capital gains.
• Taxable Accounts: Offset any realized capital gains from selling by utilizing assets with unrealized losses.
• Required Minimum Distributions: Use RMDs strategically by selling appreciated assets first to maintain your target allocation.
• New Contributions: Direct new investments into underweight asset classes to gradually restore balance.

Market Conditions and Timing

Rebalancing is especially important during volatile market conditions, such as after significant market drops or major rallies. Even in stable bull markets, maintaining your portfolio in alignment with your risk tolerance is critical, especially for those nearing retirement.

In summary, periodically rebalancing your portfolio helps ensure that your investment strategy remains aligned with your financial goals. By being proactive in managing your asset allocation, you can navigate high market environments successfully.