Whether you’re a seasoned investor or just starting out, you’ve likely heard about the importance of rebalancing your portfolio. But why does it matter? Rebalancing ensures your investments align with your financial goals and risk tolerance, helping you maximize growth while minimizing risk. Let’s break it down and learn how to make your money work harder for you.
What Is a Balanced Portfolio?
A balanced portfolio is a mix of investments tailored to your unique financial goals and risk tolerance. While there’s no one-size-fits-all approach, a balanced portfolio typically includes a mix of:
- Stocks for growth
- Bonds for stability
- Real estate for diversification
Your investment strategy will depend on your goals. For example:
- Saving for Retirement (Long-Term Goal): You might prioritize stocks and mutual funds, which have the potential for higher returns over time.
- Buying a Home (Short-Term Goal): Safer investments like bonds and cash equivalents might make more sense to preserve your funds.
No matter your goal, diversification—spreading your money across different types of assets—is the key to a balanced portfolio. But as markets fluctuate, your portfolio can drift away from your target allocation, and that’s where rebalancing comes in.
RELATED: Try These 10 Healthy Financial Habits for a Bright Financial Future
How Do You Rebalance Your Portfolio?
To rebalance your portfolio means that you reallocate funds to different places. Ideally you should be rebalancing your portfolio ideally every 3-6 months, the minimum should be once a year.
I’ll explain how I do it.
I use the app Acorns to invest my spare change. Initially, I wanted a conservative portfolio to simply grow long term. Over the course of a month, my initial $30 investment paid dividends of 2 cents. Then, I decided I have the risk tolerance to be aggressive, so why not give that a try? I changed my preference and Acorns automatically rebalanced the portfolio for me. Within another month, my portfolio had lost more that the 2 cents it made, BUT it also made back $1, which was far more than the conservative approach.
That’s one example of how to rebalance your portfolio simply by working with a company who will do it for you. The other advantage to this strategy is that, since $30 obviously isn’t enough to buy stock in all areas of which I’m invested in, they allow you to buy a percentage.
Meanwhile, if you’re a do it yourself investor, then you have a little more work cut out for you. For example if you bought a lot of stocks but want to be more conservative now, you’ll need to sell those stocks, pay any taxes on your gains and can then invest the money in bonds, etc.
This is why many people have a financial advisor help them out when it’s time to rebalance, even if they haven’t been doing it on their own. Someone who has done this for years can tell you what’s lacking in your investment strategy and how to fix it.
Key Takeaways
Rebalancing your portfolio is essential for maintaining a balanced mix of investments that align with your financial goals. By reviewing your portfolio regularly and making adjustments as needed, you can:
- Reduce unnecessary risk
- Maximize long-term returns
- Keep your financial plan on track
Whether you automate the process through an app, handle it yourself, or seek advice from a professional, rebalancing is a habit that pays off. Start today and take one step closer to achieving your financial dreams.
NEXT: Planting the Seeds of Financial Success for Your Children
Disclosure: The information provided by The Financial Genie is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. The Financial Genie does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence. Additionally, some of the organizations with products on our site may pay us a referral fee or affiliate commission when you click to apply for those products.
