Change may seem unnecessary when everything is running smoothly, and the stock market has been humming along so far this year. “If it ain’t broke, don’t fix it,” goes the saying. But we’re writing about stocks, not spark plugs, and in the world of investing it pays to be proactive.

Of all the tools available to investors, rebalancing your portfolio is among the easiest and most widely recommended. Yet, when stock prices are climbing, many of the same people who admit they should rebalance, don’t.

The process of rebalancing is simple: Review your target allocation. Compare that to your existing allocation. Sell investments from asset classes that are overweight and buy more of those assets that are underweight. Rebalancing effectively forces you to buy low and sell high, at least on a relative basis.

If you delegate these types of decisions to your financial adviser, contact them and ask about the details of your rebalancing strategy.

Most people recognize the value of rebalancing following a market correction, which typically involves adding to equities when stock prices are on sale. Fewer investors are disciplined enough to trim equity positions following periods of outperformance.

Here are a few reasons why you should consider rebalancing your portfolio:

• The S&P 500 has gained 17 percent since Oct. 31. Equities represent a larger slice of your portfolio because that slice of your financial pie has grown faster than others. As a result, you are taking more risk whether you intended to or not.

• If you take regular withdrawals, those distributions often come from the conservative assets (cash and bonds), shrinking the amount of your “safe money” over time.

• You are older than you were the last time you rebalanced. A year closer to retirement, to tapping the kids’ college funds, or to seriously consider a second property. Any of these looming expenses make it important to ensure your portfolio aligns with your goals.

There’s room for debate regarding how often investors should rebalance their portfolio, but comparing current allocations to original targets twice a year is usually sufficient. Some people prefer to rebalance only when asset classes have drifted a minimum amount (when 70 percent equity exposure grows to 75 percent, for instance).

More important than how often you rebalance is that you establish a strategy and stick to it. Adhering to a disciplined strategy will increase your chances of success.


Ben Marks is the chief investment officer at Marks Group Wealth Management in Minnetonka.