The Importance of Investment Rebalancing

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If you have left your retirement investments untouched for the past year you may be taking too much risk, given the tremendous gains in the U.S. stock market over the past year.?

That’s because the U.S. stock market has been on quite a bull market run. As I write this, it is up more than 20% in 2021. And since the pandemic market low in March of last year, an index of all U.S. stocks has doubled in value. Yes, you read that right: U.S stocks are up more than 100% in the past 12 months.?

That’s great news. But it likely means your intended mix of stocks and bonds requires rebalancing.?

I am all for long-term, buy-and-hold investing for goals such as retirement. But that doesn’t mean you can completely ignore your retirement portfolios.??

It’s important to check in on your investments from time to time to make sure that your desired mix of stock funds and bond funds is still on track.?

For instance, let’s say your asset allocation strategy is to have 65% in stocks and 35% in bonds. If you haven’t checked your overall asset allocation lately chances are your stock investments have grown to be a lot more than 65% of your overall allocation.?

With the big increase in your stock funds, you likely need to sell some shares of your stock funds or ETFs to get your mix back to your intended target and reinvest that money in bond funds.?

When you rebalance your investments inside a workplace retirement plan, or inside your own IRA, there is no tax bill when you exchange fund shares (selling shares of one fund and reinvesting in another fund.) If you own shares in a regular taxable account, any shares sold at a profit will be subject to the capital gains tax, even if you instantly reinvest the money in other funds.?

The importance of a rebalancing act?

I know it may be hard to sell shares of funds that are doing great. It’s our nature to want to stick with winners. But remember, you are not selling all your stock shares. Just enough to get your asset allocation mix back on track.??

Rebalancing is how you perform one of the keys to successful investing: buy low and sell high. Right now, you are selling some of your stock shares which are a lot higher over the past year and reinvesting that money in short to intermediate term bond funds. (Bonds do well when stocks falter. That makes them valuable ballast during bear markets. But I do not recommend?bond funds or ETFs that have a duration of more than five years. Longer-term bond funds are too risky right now.)??

Periodically checking your asset allocation mix—at least once a year—to see if you need to do any rebalancing is how you keep your risk at a level where you are comfortable. If you decided that a 65% stock/35% bond mix was right for you, and now it is at 80% stock/20% bond, you have taken on more risk.?

While the markets have been going up and up, we all know that is not always the case. We don’t know when the next big loss for stocks will happen, but if you told me we would be in for a correction sometime?in the near future, or even a bear market (a stock drop of at least 20%) I wouldn’t be surprised. To repeat: stocks have more than doubled in little more than year. That’s quite a run. Rebalance now and you will be ready to ride out any market turbulence. And that is the key to successful long-term investing.

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