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What Is Rebalancing or Redesigning A Portfolio?

If you are conscientious enough to design and track an investment portfolio, you will almost certainly have cause to rethink it at some point. You may be entering a new phase of life that requires a new investment horizon. Perhaps unexpected changes in your family or financial circumstances call for different strategies. Whatever the reason, it may be necessary or appropriate to make some changes to the composition of your portfolio.


You can change your portfolio through one of two basic strategies: redesigning or rebalancing. Redesigning, the more drastic of the two measures, involves dismantling your old portfolio and starting fresh with a new one. Although redesigning might be a viable option in extreme cases where every part of your portfolio has failed to meet your expectations, you should generally not choose this strategy based solely on investment performance.

However, when faced with a major life change such as retirement, you should definitely consider redesigning. If you are about to retire and have not done much to change your portfolio in 30 years, it may be time for a complete overhaul that reflects how your investment needs and goals have changed over that time. In such a case, the redesigning process might involve eliminating investment categories that may no longer be appropriate while adding fixed-income bonds and/or other investments that better suit your current needs.

You should not be too quick to totally redesign your portfolio, however. For example, while loss of a job certainly qualifies as a major life change, it does not necessarily mean that you should redesign. If you are panic-stricken over the sudden loss of income, keep in mind that it may only be temporary. You may find a new job that restores your financial security and supports the investment goals on which your original portfolio was built.

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Rebalancing involves restoring your original asset allocation by shifting your funds among investment categories to regain the ratios you decided on when you first designed your portfolio. You simply make changes as needed to bring your asset allocation back in line with the plan originally determined to be appropriate for your investment objectives.

Example(s): Say that your original asset allocation scheme calls for 50 percent stocks, 30 percent bonds, and 20 percent cash alternatives. You have $100,000, so you start out with $50,000 in stocks, $30,000 in bonds, and $20,000 in cash alternatives at the beginning of the year. Over the course of the year, your stocks provide a 10 percent return, bonds a 5 percent return, and cash investments a 1 percent return. Consequently, assuming that you reinvested your earnings, at the end of the year you have $55,000 in stocks, $31,500 in bonds, and $20,200 in cash. This means that the distribution of your assets has changed to 52 percent stocks, 30 percent bonds, and 18 percent cash.

Caution: The example above is for illustrative purposes only and does not represent the actual returns of any investment or portfolio.

This change in percentages may pose a problem because you chose the original percentages with the intention of maintaining them in accordance with your own particular risk tolerance and expected return. Since stocks now make up a larger percentage of your portfolio than you had once intended, the volatility of your portfolio may have increased.

There are a few simple ways to bring your portfolio back into alignment. You can sell some of your stock so that the ratio of stocks to other investments drops; you can sell some stock and invest that money in other assets so they once again are at their original percentages; you can add money to the portfolio and buy more bonds and cash alternatives; or you can do some combination.

Many investment advisers recommend using shifts of 5 percent or more as a trigger for rebalancing. Others recommend that it be done every year. Tax time or year-end is usually a good time to check up on your portfolio and think about rebalancing if necessary.

Caution: You should consider the transaction costs and/or tax consequences that might result from rebalancing. For example, selling investments as part of your rebalancing strategy might trigger capital gains tax and/or (in the case of a mutual fund) redemption fees. Before investing in a mutual fund, carefully consider its investment objectives, risks, charges, and expenses, which can be found in the prospectus available from the fund. Read it carefully before investing.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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