Once a quarter, tend to your portfolio and rebalance to your target allocation
You’ve heard the age old advice to buy and hold your investments, remain diversified, and to dollar cost average with every paycheck to invest more. That’s all fine and dandy but even a passive portfolio requires upkeep and maintenance.
Maybe you’ve decided your target allocation is 80% stocks, 20% bonds, or maybe you’ve assigned real estate or alternative/satellite investments to your target allocation. Whatever it is, all these asset classes are somewhat uncorrelated and move differently. Over time, the actual allocation will look very differently than your target allocation if you never rebalance it – buy the underweight classes and sell the overweight classes.
Remember, you set your target allocation based on the return needed to accomplish your financial goals with the least amount of risk. If you don’t rebalance, you could be invested with too much risk or with an allocation that’s unlikely to grow at the return that’s needed.
Rebalancing more than each quarter (three months) is too much trading and you’re in a position where you’re reacting to the markets again (especially in the 24 hour news cycle these days). It’s not uncommon for investors to rebalance at a frequency of every six months, or even one year. At some point this becomes more about comfort than anything else but I wouldn’t recommend waiting longer than a year. Nonetheless, the important thing is to rebalance. It’s like getting a haircut – we all have a different length of hair we think looks best on us and it grows at different speeds, so we go to the barber at different frequencies. But we all go to the barber when things get messy, otherwise we just look ugly.
Rebalancing should be done in coordination with tax loss harvesting.
Just remember, I’m not your financial advisor so the information may or may not best apply to your situation and you should get formal advice prior to doing anything. The information/data that is shared should be double checked by you and any conclusion that is driven based on past data is not to be interpreted as my advice for your future. I will do my best to only write what I think is true and right, but mistakes happen and we’re all learning together – this is meant to be an informal conversation.