So you took lots of time carefully selecting all the assets in which you want to invest.
Wait just one second.
Did you think about how all those assets play together as far as generating returns?
How about their diversity, which helps prevent major losses if any one asset class takes a nosedive?
And what will you do in the future, when asset values and financial situations change — shifting the balances in your portfolio?
All of these considerations are part of a practice called “portfolio rebalancing.”
If you’re a newer investor — or simply getting ready to branch out into more modern asset classes — you’re going to want to read this guide to all things rebalancing.
Defining Portfolio Rebalancing
There is a critical decision every investor must make whether setting up their portfolio for the first time or adding new assets to it: What percent of each type of asset do you want to hold?
Back when stocks and bonds ruled the investing kingdom, the 60/40 rule was born. Under this rule, investors were to fill their portfolios with 60% stocks and 40% bonds. While this asset mix doesn’t take into account all the many asset types at our disposal today, it does illustrate the underlying goal of portfolio rebalancing: finding the right blend of riskier assets (e.g. equities like stocks) and more dependable assets (e.g. bonds) to keep your portfolio safe from major losses while still generating returns.
Over time, the value of all assets changes. These changes will cause your asset allocations to shift in a fluctuation known as “drift.”
Drift can easily push your well-balanced portfolio into risky territory by decreasing diversification.
The less diverse your portfolio, the more heavily invested you are in certain asset classes. This increased exposure can equate to financial loss if those assets drop in value.
Portfolio rebalancing is all about planning for and correcting drift — through buying and selling assets strategically, more on that later — to get your portfolio back within its intended diversification and risk parameters.
When to Rebalance Your Portfolio
Let’s talk timing when it comes to portfolio rebalancing.
In an ideal world, you’d make time to review your portfolio balance once a month. At the very least, you should review your asset allocation annually.
Some investors take a different route — setting target asset allocations and rebalancing when those shift by a certain percentage. A ten percent difference is where many experienced investors feel it’s worth the effort of rebalancing.
For example, let’s say your goal is to fill 20% of your portfolio with real estate-related assets. However, due to unfavorable market conditions, your current real estate holdings are only making up 10% of your portfolio. This is when you may consider selling off overperfoming assets, or taking some of the returns from elsewhere in your portfolio, and investing more into real estate to bring back balance.
3 Reasons Why You Should Rebalance
Read on to see why it’s actually worth it to bother with rebalancing.
Rebalancing isn’t just about catching the underperformers. There’s also real return to be found in catching the overperformers.
When you check your portfolio on the regular, you’ll be able to quickly ID assets that are skyrocketing in value. By selling these before they dip back down, you’ll be able to generate tons of ROI — and even reinvest it if you like!
The act of portfolio rebalancing has actually been found to increase returns, without growing risks. By spending nothing but your time on rebalancing, you can grow your portfolio’s returns.
As we’ve touched on quite a bit, a varied portfolio filled with uncorrelated assets should be every investor’s goal. A diversified portfolio is a powerful tool for gradually growing wealth as well as weathering economic downturns.
Through regular rebalancing, you will be able to ensure that no single asset class is dominating your holdings — subjecting you to more loss than necessary should that asset class meet its downfall.
For more wealth protection advice, check out Wealth Protection: Financial Experts Share Their Tips.
Modify to Match Your Life
One of the great things about life? It’s forever changing.
Retirement, developing relationships, family growth, educational opportunities, vacations, etc. — there’s a lot that will impact your earnings, your financial objectives, and even your risk tolerance over time.
It takes active portfolio management to match your assets to all these shifts.
Regular portfolio rebalancing is a great opportunity to actively check in on and adjust asset allocation and performance to align with your life.
How to Rebalance Your Portfolio in 4 Steps
Finally, let’s get that rebalancing done by following this tactical walkthrough.
Step 1: Set Your Financial Goals
This first step could be the easiest — or the hardest.
It’s goal-setting time.
What are you saving for short-term (say a vehicle purchase) and/or long-term (like early retirement)? Setting clear goals help you maintain your momentum and create an effective and focused rebalancing and investment strategy.
If you feel you have too many goals to remember all at once, at the very least prioritize them carefully. That one you placed at the top of your list? Commit that to memory and think about it every time you make a purchase, an investment decision, or rebalance to help keep yourself on course.
Step 2: Determine the Risk Level With Which You’re Comfortable
Risk is a complex topic.
In this context, risk is basically the chance that investment return won’t match up with expectations.
We find this definition helpful in reframing the concept of risk. It’s not something that’s meant to always be avoided. It can actually be an asset in your portfolio — exposure to risk is often the cost of generating outsized returns.
But how much risk is right? Well, the truth is that everyone's risk tolerance is different.
Risk tolerance is the balance of how much money you can actually afford to lose combined with how much you can mentally handle losing. Tolerance is usually measured on a low, medium, high scale. Younger investors tend to tolerate the most risk, simply because they have a longer time horizon before retirement — so loss in the nearer term isn’t as catastrophic for them.
To find your risk tolerance, you can start by checking out an online risk calculator. For an even more robust understanding of where you land on risk and how that should impact your financial decisions, speak to a licensed financial professional.
Why does risk tolerance matter in portfolio rebalancing? Because it should heavily guide where you land on risky vs. predictable investments when it comes to asset allocation.
Learn even more about risk in the scheme of holistic portfolio optimization here: Portfolio Optimization: How to Find Your Investment Balance.
Step 3: Monitor Your Portfolio With Kubera
Knowing the financial goals and risk level you’re aiming for, now it’s time to establish transparency into your assets so you can make sure they align with these decisions.
This is where Kubera enters the scene.
Kubera doesn’t handle rebalancing for you — instead it’s a tool that provides the data and insights necessary to monitor and balance your portfolio.
To sum it up, Kubera is powerful personal balance sheet software with top-of-the-line connectivity.
What does that mean?
That you can finally track every single asset in your portfolio — which makes for optimal visibility when it comes time to rebalance according to your investment goals, risk tolerance, and personal needs.
What does it look like to use Kubera?
First, simply connect account-based assets such as bank accounts, cryptocurrency accounts, brokerage and other investment accounts, retirement accounts, and so forth to your Kubera dashboard. Data from these accounts will update in real-time thanks to our interfaces with major financial institutions across the world.
Next up, add in your possessions without accounts — tangible real estate holdings, metals, collectibles, antiques, cars, jewelry, domains, and more. It is quick and simple to maintain their value and other details using Kubera’s intuitive interface.
On top of this, Kubera’s custom-built tickers provide yet another method to track the value of many cryptocurrency and stock market holdings including exchange-traded funds (ETFs), mutual funds, and more.
Additional features like our IRR for investments calculator, a Recap screen for tracking changes in net worth and investable asset value, investable asset and cash on hand features, and a distinctive beneficiary management workflow all make Kubera the best option for all-in-one portfolio monitoring and management.
Once all of your various assets are uploaded and tracked inside Kubera, you instantly have the insight required to comprehend current allocation — and what adjustments are required to take it back to your original allocation targets.
Step 4: Buy and Sell Assets to Get Back in Balance
All that prep work was pivotal in getting us to this final step. Now, it’s time to take action.
In a typical rebalancing process, what you would do is take the returns from asset overperformance, or an asset sale, and use that income to purchase more of an underperforming asset.
What about rebalancing when market fluctuations head downward and there isn’t much in the way of returns to reinvest? This is when it’s recommended to rebalance based on target allocation percentages, instead of on length of time passed.
To learn more about rebalancing strategies during times of market volatility, this guide is a helpful resource.
Looking for some actual platforms that can assist you through this final rebalancing step? Be sure to check out our list of investment portfolio rebalancing tools.
Simple Portfolio Rebalancing Begins at Kubera
Creating an asset allocation strategy and rebalancing plan that takes your goals and portfolio performance into account — it’s a lot.
Simplify a small part of your life with Kubera, which we built to make finances more transparent and manageable for DIY investors.
Kubera offers straightforward pricing for investors as well as investment advisors. In addition, our white-label solution helps financial advisors, wealth managers, and more offer modern and informed financial advice.