Jack Dugan

Jack is a graduate of San Diego State University with a Masters Degree concentrating in Personal Financial and Tax Planning. In 2008 Jack was recognized as one of “America’s Top Financial Planners” by the Consumers’ Research Council of America. Jack has been named as one of San Diego’s Top Wealth Managers for 7 consecutive years (2010-2017). [...]

What are the best practices for portfolio rebalancing and what are the benefits of rebalancing your portfolio of investments? Senior Financial Planner Jack Dugan, CFP® from Pure Financial Advisors explains.


Today’s topic is rebalancing your portfolio. And if we’re going to talk about rebalancing a portfolio, we’re assuming you have a balanced portfolio to start with. Well, what exactly is that? Well, when you originally designed your investments, you used different types of investments – different asset classes. Things that have different expected rates of return and different risk characteristics. And you did this to achieve the desired rate of return while minimizing the overall risk of the portfolio.

You might have used things like US companies, international companies, emerging markets, real estate, precious metals, corporates and international bonds, just as an example.
All of those asset classes have different expectations and levels of risk. And to manage the risk, you assigned a certain percentage to each of the investments depending on how aggressive or conservative you wanted to be. If you wanted to be more aggressive, you would have more of the portfolio on the stock side. And if you wanted to be more conservative you would have more weighted in bonds.

Once you are invested, the investments are going to fluctuate. Some of those asset classes may have a disproportionate rate of return. As an example: in the US companies, I bought a basket of stocks or a mutual fund or an ETF that mirrors the S&P 500. And let’s just say that percentage I’ve assigned to it is 20%. Well, the S&P moves in one direction or another, and it becomes disproportionate to the other asset classes – it may become a smaller portion of the portfolio or a larger portion of the portfolio. Perhaps now it is 30% of the portfolio and I might have more risk than I really want. And the same holds true on the downside – if now it is only 10% of the portfolio, I might not be taking on enough risk to achieve the goals and objectives of the portfolio.

We recommend setting up bands or tolerance levels. In my example where I had 20% in US companies, I set a 20% variance, meaning the stock can go as high as 24% and as low as 16% before any action takes place. If it exceeds those parameters, then I sell on the high side, and I buy it when it drops below 16%.

This disciplined approach helps me eliminate two of the biggest emotions that cause the most harm to our portfolios, and that’s fear and greed. When things are going up, we think it’s going to last forever, and we don’t want to sell. And when things are going down, our fear takes over and we certainly don’t want to buy any more, and we probably want to get out altogether.

Using this disciplined investment approach will give you an appropriate method of managing the risk of the portfolio, and hopefully, provide the desired outcome of the investment.
If you have any questions or for more information, contact Pure Financial.