How and When To Make Portfolio Adjustments

Investment portfolios need to be adjusted periodically to make sure that the asset allocations are still optimal to meet your goals and their timeline and to accord with your risk profile. But how and when should you be making portfolio adjustments? 

There’s no set method or time period for portfolio adjustments. It is a good idea, however, to meet at least once a year with a financial advisor to review the performance of your portfolio. At PAX Financial Group we have a team of CERTIFIED FINANCIAL PLANNER™ Professionals who can assist you. They can help you determine whether adjusting your portfolio makes financial sense for your goals, time frame risk, and level.


What Is Portfolio Rebalancing?

The process of adjusting a portfolio is often called “rebalancing,” which refers to either selling or buying asset classes to rebalance the optimal asset balance.

All portfolios have an asset allocation. The three major asset classes are stocks, bonds, and cash instruments such as certificates of deposit. High-net-worth individuals may also invest in alternative asset classes, such as collectibles, real estate, and commodities.


Reviewing Risk Profiles and Asset Allocation

All asset classes have a risk profile. Stocks, for example, are relatively high risk because stocks are volatile. Stock prices fluctuate every day, and stocks can potentially lose money. Stocks also, however, enjoy the highest returns, on average, of any asset class. Some portion of investment in stocks is therefore very advisable in portfolios, to power the overall growth of your investments and outpace inflation.

The risk profile of bonds and cash, on the other hand, is relatively low. While underlying bond prices may fluctuate (they move inversely with interest rates), the fluctuation is usually much less than the fluctuation potential in stocks. Bonds also generate interest. The underlying value of cash instruments is stable and never fluctuates, and cash instruments accrue interest.

The asset allocation in your portfolio is generally set with several parameters, including your long-term financial goals, your time frame, and your risk tolerance. If you are in your 20s and 30s and saving for retirement, for instance, your portfolio may be heavily weighted in stocks with a minimal investment in bonds or cash for stability. Why? Because stocks held for the long term are likely to generate the maximum appreciation over time. Your time frame to retirement ensures that any downturn in stocks is likely to be made up over time. 

If you are in your late 50s, on the other hand, and plan to retire in your 60s, your retirement savings might require a very different allocation, as retirees generally want stable income. A pre-retirement portfolio might, for instance, be allocated between stocks, bonds, and cash, with the latter two asset classes designed to be rebalanced to become more heavily weighted in retirement.


The Need for Rebalancing

The decision to rebalance is a personal decision based on your goals. Generally, the time to make portfolio adjustments may happen under one or several of the following scenarios.

  • Market action 

Let’s say you’re in your 50s and want to maintain an asset allocation of 60 percent stocks, 20 percent bonds, and 20 percent cash, to provide a blend of strong returns and protection against volatility. Over time, that allocation will change due to market action. If stocks have a good year, the allocation may grow to more than 60 percent. If they have a bad year, it will decline to less. An annual review is a time to reflect on whether you need a rebalancing to return to the initial allocation or are comfortable maintaining the changed one.

  • A change in goals

Your portfolios are designed to meet your financial goals. It’s a characteristic of goals that they change over time. Your desired portfolio allocation can change as your goals do. 

Let’s say you want to put a down payment on a house. It’s usually advisable to place funds you plan for a down payment in short-term funds with stability, to avoid the risk of a short-term downturn in more volatile asset classes. This can be accomplished with a rebalancing.

  • A life change

Numerous life changes can cause a change in your funds available for investment, your risk tolerance, or your goals. Marriage, divorce, the birth of a child, a serious illness, an inheritance – all can change these elements and make a rebalancing advisable.

  • Tax considerations

Capital gains or losses in stocks can be used for tax-loss harvesting, in which losses are used to offset gains and thus lessen or eliminate the taxes. These considerations may cause you to choose to rebalance.

  • Locking in gains

There are several reasons you might want to lock in gains in some asset classes, such as stocks. You may have had a strong run in a stock, mutual fund, or exchange-traded fund (ETF) and want to sell the stock to realize your gains and put the money toward a goal. Or, economic conditions or a stock market forecast by your Texas financial advisor might indicate that realizing gains is advisable.


When Not To Rebalance

Be aware that not every change in a portfolio’s asset allocation creates the conditions for rebalancing in the context of long-term financial planning in San Antonio, Texas. A drop in the price of volatile investments, for example, sometimes creates a desire to sell on the part of investors, to stop the losses. But that’s almost never a prudent idea for the long term, because it locks in the loss.

Drops in the stock market happen periodically and are expected. Over the past century, stock market declines have been followed by upswings that make up the losses. As a result, investing for the long term, through good and bad times, will likely ultimately provide stronger returns. In addition, if you reinvest dividends, remember that the dividends will purchase more of a depressed stock price, further powering your portfolio when market action turns upward again. 


Contact PAX Financial Group for Rebalancing Questions 

At PAX Financial Group, we are fiduciary financial advisors who recommend investing plans and strategies based on what’s best for you. Our rebalancing takes place as part of a comprehensive financial plan based primarily on your goals. We can meet either by phone or in our convenient San Antonio, Texas office. Contact us to discuss your financial planning, including reviewing your portfolios in light of your goals and their performance.



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