If an investment is successful, most people naturally want to stick with it. But is that the best approach? It may sound counterintuitive, but it may be possible to have too much of a good thing. When deciding how to allocate investments, many start by taking into account their time horizon, risk tolerance, and specific goals. Over time, the performance of different investments can shift a portfolio’s intent—and its risk profile—in a phenomenon sometimes referred to as “risk creep.” Rebalancing is the process of restoring a portfolio to its original risk profile. Remember, asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. There are two ways to rebalance a portfolio, described in the investment planner guide below.
Use New Money
When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.
Sell & Reallocate
The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.
Keep in mind, however, that the information in this material is not intended as tax advice and may not be used for the purpose of avoiding any federal tax penalties. Please consult a tax professional or investment planner before rebalancing. The process may result in a taxable event.
Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.
If you are interested in rebalancing your portfolio, it pays to work with a trusted financial planner from Family Financial Partners. Headquartered in Lexington, KY, their team of financial advisors and investment planners has helped numerous clients with evaluating their investments since 2005. Call (859) 219-1006 for an initial consultation, or go online to learn how they can help you today. You can also visit feeforplan.com for more information about financial plans tailored to your unique stage of life.
This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party nor their affiliates. This information has been derived from sources believed to be accurate. Please note: investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
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