Should You Rebalance Your Portfolio?

Many financial “experts” recommend rebalancing your stock investments from time to time. This goes in stride with diversifying, something I have made clear that I have NOT done with the portfolio on this website. It is generally accepted that you shouldn’t invest too heavily in one stock or one industry because that would increase your risk. Instead, you should spread your money over a variety of things so that all your eggs aren’t in one basket, as the saying goes.

Many people choose to invest in mutual funds and/or ETF’s along with perhaps some individual stocks. In my 401K for instance, I have everything in mutual funds because that is all that is offered. The choices available to me are mutual funds that fall under such categories as “growth”, “value”, “income”, “international”, and a few others. 

But no matter what your investments are comprised of, rebalancing is something that I don’t believe in and have never done myself.

What Is Rebalancing?

Say you have $100,000 in your 401K or IRA and you choose to put 25% into each of the categories listed above. Over time, those percentages will change as some categories do better than others. Maybe your growth fund has done very well and now represents 30% of your portfolios value while your international fund has underperformed and now is only 20% of the total portfolio value. (The same example can be used with individual stocks)

If you choose to rebalance, it means just what it sounds like: you would move money around to make the percentages more inline with what they started at which is 25% for each category.

Some financial advisors argue this reduces your risk because you now once again have equal amounts of money spread over four categories of investments. You aren’t too heavily invested in one area which is seen as less risky. But I would argue that in most cases, rebalancing just doesn’t make any sense. I think it is often something the brokerages and other industry insiders recommend to keep you actively trading, thus increasing your trading fees.

Rebalancing Means Taking Away From The Winners

My Apple stock has done VERY well and now represents about 22% of my portfolio. When you take out the cash that isn’t invested in anything, it represents 33%.

But should I “rebalance” and sell some of that Apple stock because too much of my money is in one stock?

NO! Absolutely NOT!

Why should I take money out of AAPL which is my big winner to put it somewhere else or in another stock that isn’t doing as well? If I had rebalanced earlier I wouldn’t have that big gain that I have right now. As long as the companies fundamentals don’t change (and I continue to like the way things are going at Apple) I will not be selling any shares of my biggest winner!

Whenever you rebalance any kind of financial investment, it means you are taking money out of the things that have done the best and putting that money into things that haven’t done as well. Your money may be more evenly distributed among asset groups but you have done it by taking away from the winners. For me, that is something that I am not willing to do.

The level of risk tolerance you are comfortable with and your age (how close you are to retirement) can definitely come into this conversation. Some people just feel better knowing that they are diversified no matter what and that’s fine. They might choose to rebalance to give them the best chance of preserving their money in a market downturn.

I just wanted to make it clear that rebalancing means taking away from your best performing assets and putting that money into something that hasn’t done as well just for the sake of evening things out. Thats a silly reason in my opinion!

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