Kyle Stacey is a CERTIFIED FINANCIAL PLANNER™ professional with Pure Financial Advisors. Kyle graduated from San Diego State University, earning his BA in Financial Services and received the SDSU Personal Financial Planning Certificate. Kyle works directly with clients to help them accomplish their financial goals specifically pertaining to the areas of retirement planning, tax planning, [...]

Kyle Stacey, CFP® explains what it means to rebalance your investment portfolio and how portfolio rebalancing benefits your overall financial standing in the long run.

So today’s topic, I wanted to talk about portfolio rebalancing as well as how that affects your portfolio and how to keep the integrity of your portfolio.

So when it comes to investing, you want to make sure that you’re managing the things that you can control and that is, number one, the risk that you take within the portfolio. So there’s different asset classes that you can hold within your portfolio. There’s United States government bonds. There’s corporate bonds, global bonds, United States companies, international companies, emerging markets, and the like. Each one of those asset classes has different expected rates of return. Some are more risky than others. So stocks, for example, are going to be more risky than bonds. And when you’re constructing the portfolio, you want to make sure you’re taking on the appropriate level of risk based on your cash flow needs.

Once you determine how much of each asset class that you need within that portfolio, you then want to make sure that you’re managing those investments appropriately because as the market goes up and down every single day, so do those investments. But it doesn’t make sense to rebalance every single day because the costs of doing that rebalancing are going to be too expensive. So we recommend putting a tolerance band on each one of those investments – 20 percent give or take is usually what we recommend.

So for example, if one of those asset classes that you have has a 10 percent initial allocation, giving it a 20 percent band, that’s going to represent up to 12 percent or down to 8, to stay within balance. If it deviates too far out of the range, you want to bring that back in line. So what that does is, if you do that across multiple asset classes, it allows you to systematically buy low and sell high. And that takes out one of the biggest detriments to a portfolio which is your emotion, right? Fear and greed tend to drive a lot of investment decisions along the way. So having a systematic approach to rebalancing the portfolio and controlling how much risk that you have within that portfolio is going to be important. Using this disciplined investment approach is going to allow you to have a lot more successful investment experience.

If you’d like additional information on rebalancing, and the portfolio in general, visit our website PureFinancial.com. We’ve got a ton of resources there. Click on the financial resources tab at the top of the website, we’ve got white papers, webinars, blogs and the like. And if you’d like to come in for an assessment for us to check out the portfolio, we can do that as well.

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