Education on Rebalancing Portfolios

As we enter the final quarter of 2023, financial markets remain up and down – yet, far less volatile than in 2022. In fact, many stocks have recovered quite a bit this year. The same cannot be said for bonds, as the Federal Reserve continued to raise interest rates this year. What comes next? Recession? A peak in stocks? A recovery in bonds? Regardless of the short-term outlook, I ask that you join me in the following: 

• Trust your plan and stick to having money in each of your three buckets: cash, bonds, and stocks based on your personalized financial plan [Review concept here] 

• Try to remember that when it comes to investing, we need to do our best to look past the short-term gyrations and focus on the long-term opportunities. How do we position things to work towards the long-term rate of return we need for your financial plan? What updates should we make as markets and economies change? Where do you want to be for the next 3-to-7-year cycle? 

With that in mind, let’s review the concept of rebalancing portfolios.

What is a rebalance?

When we started investing, we chose investments spread out among different asset classes, which when put all together, created an “allocation” based on risk and reward targets. Essentially, we keep 3 different investment buckets: cash, bonds, and stocks. When markets move over time, the overall allocation changes, which may mean we are no longer positioned the way we want to be.  

Rebalancing is the process of realigning the weightings of your portfolio by buying or selling to maintain, or in this case “go back to” our original or desired mix of assets. Said more plainly, your long-term stock bucket has recently grown again as the fixed income (bonds) struggled these last 2 years. Rebalancing would place more money back into that short-term bond bucket. For example, say an original target asset allocation was 40% stocks and 60% bonds. If the stocks performed well during the last 12 months, it could have increased the stock weighting of the portfolio to say 45%. By rebalancing, we would be selling some stocks and buying bonds to get the portfolio back to the original target allocation of 40%/60%. 

Why is it important to do?

Rebalancing is adhering to the age-old investment advice of “sell high and buy low,” taking the gains from higher-performing investments and reinvesting them in areas that have not yet experienced such notable growth. Or in this case with the stock market’s recovery, selling some of our stock holdings that have held up better than bonds and buying back into those bonds, if they appear to be undervalued and ready to recover as well, should interest rates start to decline again. Some would say the only returns that matter are the ones you keep. Taking 5% out of stocks is like cashing in gains and moving them to a historically safer and less volatile position, bonds. 

When should I do this?

This is the part that requires some additional thoughtfulness and conversation. While “now” is better than never, we do want to do our best to execute this rebalance at a time when we feel more confident that the Federal Reserve may be done raising interest rates. We believe that may represent the beginning of a recovery in bonds. We do not believe we can time this perfectly but want to be mindful and disciplined in our approach. 

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. 

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