The Power of a Well-Timed Investment Rebalancing Strategy

by Eric Biddle (Lego men on teeter totter staged with the help of Miss Ava Biddle)

by Eric Biddle (Lego men on teeter totter staged with the help of Miss Ava Biddle)

To rebalance your investment account means to sell off the stocks, ETF’s, or Mutual Funds that have increased in value in order to purchase the ones that have decreased in value.  Let’s create a simple example: we’ll say your portfolio is designed to be comprised of 50% international stocks and 50% U.S. stocks.  Furthermore, let’s assume that the U.S. stocks have rallied over the last year and the international stocks are now depressed.  Because of the change in value, let’s say your portfolio is now comprised of 35% international stocks and 65% U.S. stocks.  Your portfolio is now out of balance.  To rebalance this portfolio means to take this portfolio back to a 50/50 split.  By doing this, you are naturally selling the U.S. stocks at a higher value and purchasing the international stocks that are currently lower in value.  In essence, you are buying low and selling high. 

The power of this well-timed investment strategy is probably obvious but if once or twice a year (or after big swings in the market) you can rebalance, you will theoretically always be selling investments after they’ve rallied and purchasing them when they have potential to rally.  Please understand that this is the theory behind rebalancing but it does not always work out this neatly.  The possibility certainly exists that you could sell off investments before the rally is over and that you could purchase investments that continue to decline in value for a long period of time.  There is always a bit of guesswork involved in making this move.

All this to say, in light of the current market volatility, it may be a good time to discuss with your financial advisor whether or not it makes sense for you to rebalance all or part of your investments.

The ideas, strategies and thoughts expressed in this article do not constitute advice for your personal situation.  Please seek the advice of a financial advisor, tax advisor, or attorney.  We, of course would be happy to dialogue with you about anything that interests you.


Investing, rebalancingEric Biddle