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What you need to know before rebalancing an investment portfolio

After a volatile year in the equity and bond markets, experts say it may be time to rebalance your portfolio by getting your assets back in line with your original goals.

As of November 28 S&P 500 Index is down about 17% year-to-date, and the US bond market is down about 13%, leaving many investors with significantly different allocations from a year ago.

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Generally, you choose the initial percentage of stocks, bonds and other assets based on your risk tolerance and goals, said certified financial planner Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan.

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But as markets fluctuate, the allocation of each type of asset can change, and without periodic rebalancing, “the portfolio starts to look very different,” he said.

For example, if your goal is 50% stocks and 50% bonds, those percentages could eventually shift to 70% stocks and 30% bonds, which is “much more risky” than the original allocation, Watson said.

How to know when to rebalance your portfolio

The big part that can come with rebalancing your portfolio is the collection of tax losses.

Ashton Lawrence

Partner at Goldfinch Wealth Management

You can rebalance with new deposits, including reinvested dividends, or by exchanging one asset for another. Watson generally considers the cumulative investment across all accounts and makes necessary adjustments to tax-deferred or tax-exempt retirement accounts.

However, rebalancing taxable brokerage accounts could open up other opportunities, especially in a down market, experts say.

“The big part that can come with rebalancing your portfolio is collecting tax losses,” allowing you to offset gains with losses, said Ashton Lawrence, CFP and partner at Goldfinch Wealth Management in Greenville, South Carolina.

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While the average investor could save on year-end tax losses, he said, there were “a few opportunities” in 2022 amid stock market volatility.

Rethink your risk tolerance

Regardless of your portfolio changes, Lawrence said it’s important to consider current economic conditions, including what’s expected.

“You should always double-check your risk tolerance,” he said, explaining that investors tend to be more risk-averse in a bull market and tend to become “highly risk-unfriendly” in a bear market.


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