What does Rebalancing mean?

Rebalancing is a vital part of maintaining a healthy investment portfolio. It involves realigning the proportions of assets in your portfolio to match your original asset allocation strategy. Over time, due to market fluctuations, certain investments may grow faster than others, shifting your risk exposure. Rebalancing helps bring your portfolio back in line with your risk tolerance, investment goals, and time horizon.

Think of rebalancing as a financial check-up—it ensures your investment plan stays on track no matter what the market does.

Why Rebalancing Matters…

As markets move, your portfolio naturally drifts from its original allocation. For example, if stocks outperform bonds, your portfolio might become overly weighted in equities, exposing you to more risk than intended. Rebalancing restores your intended asset allocation, helping to manage risk and maintain long-term financial discipline.

Ignoring rebalancing can lead to overexposure to volatile markets or underperformance in key asset classes, potentially derailing your long-term goals.

When Should You Rebalance Your Portfolio?

Most financial advisors recommend rebalancing:

• On a regular schedule: Quarterly, semi-annually, or annually
  
  
• When allocations shift significantly: If an asset class deviates 5% or more from its target
  
  
• After major life or financial changes: Retirement, job change, inheritance, etc.
  
  

Using automated rebalancing tools or consulting with a wealth advisor can make this process easier and more efficient.

How Rebalancing Works

Let’s say your target asset allocation is 60% stocks and 40% bonds. After a strong bull market, your portfolio may shift to 70% stocks and 30% bonds. To rebalance, you’d sell some stocks and buy bonds to return to the original 60/40 split. This disciplined approach helps you “buy low and sell high” systematically.

Tax Considerations for Rebalancing

Rebalancing can trigger capital gains taxes in taxable accounts, so it’s essential to consider:

• Tax-advantaged accounts first (like IRAs and 401(k)s)
  
  
• Using new contributions to adjust weights instead of selling
  
  
• Tax-loss harvesting to offset gains

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