In life, balance is everything — whether it’s finding time between work and family or maintaining a healthy diet. The same goes for your investments. Keeping your financial portfolio balanced is a smart way to stay on track toward your long-term goals, even as the markets shift.
That’s where portfolio rebalancing comes in. Rebalancing is the process of adjusting your investments — like stocks, bonds and cash — so they stay in the right mix for your needs. This mix, known as your asset allocation, is designed to reflect your comfort with risk, your investment goals and how long you have until you’ll need to use the money for a major life event like retirement or the purchase of a new home.
For example, let’s say your target portfolio is made up of 60% stocks, 30% bonds and 10% cash. Over time, as the value of each investment changes, your portfolio may become unbalanced. If stocks have a great year and rise in value, they could end up making up 70% of your portfolio. That means you’re taking on more risk than you originally intended.
