Why it's important to rebalance your portfolio

Woman and man walking on a fallen tree

By Thomas Crandall, Senior Director, Asset Allocation, WMS Research - Ameriprise Financial 

Key Points

  • Strategic asset allocation can help you reach your goals. On the contrary, blindly following the drift of the markets can expose you to unnecessary risks.
  • Rebalancing is about managing risks, not returns. Keep watch, review and adjust.
  • Have a plan and stick to it. Work with your Ameriprise advisor to regularly rebalance your long-term investment portfolio based on your goals.

The U.S. stock market has been on a remarkable run since the financial crisis more than 10 years ago — a run that ranks up there with the best of all time. If you are an investor who has held stocks since the Great Recession and currently holds, you are likely noticing:

  • That your chance of reaching your financial objectives has improved materially since the end of the Great Recession in 2009
  • That the stock allocation in your portfolio has grown (in size and proportion), perhaps beyond the original long-term investment strategy you developed with your financial advisor

If the degree of emphasis that stocks play in your portfolio has outgrown your long-term strategy — your strategic asset allocation — we believe you may be susceptible to unnecessary risks should stocks falter, as they did at the end of 2018. We also believe that adhering to your strategic asset allocation through regular portfolio rebalancing can help keep you on track toward your goals.

What is portfolio rebalancing?

You’ve likely heard the saying about “not putting all your eggs in one basket.” Strategic asset allocation applies this concept to the investment markets. At Ameriprise, our strategic asset allocation conversation with our clients focuses on four major asset classes - cash, fixed income, equities and alternative investments - and tailoring the approach to the risk tolerance, time horizon, tax situation and goals associated with an account.
Investments that offer higher potential returns tend to come with higher risks, while investments that offer lower potential risks usually come with lower returns. Asset allocation is a process through which you and your advisor find the right balance of investments, risk and return to help increase your chance of meeting your goals while reducing the risks associated with your investments.

How to rebalance your portfolio

If asset allocation is the North Star of your investment strategy, rebalancing can help keep you oriented. Rebalancing acts as a counterbalance to what is going on in the markets and is used to bring you back in line with your long-term investment strategy, while aiming to reduce the risk of not achieving your goals. For example:

  • When stocks (equities) are falling in value, rebalancing could mean moving money out of safer assets (like cash) and adding to your portfolio’s stock exposure. 
  • When stocks are rising — as they have been for much of the last decade — rebalancing could mean taking profits (selling some of your stock allocation to reap gains) and redeploying those dollars into perceived-safer positions, like bonds or cash.

In both cases, you are fighting instincts that may suggest you sideline assets when markets are rough or become more aggressive when markets have been good. This is one reason why rebalancing can serve as a valuable tactic when market swings evoke emotion and subsequently, emotionally driven decisions that can derail progress toward your goals.

Why rebalance?

Table
These figures are shown for illustrative purposes only and are not guaranteed. They do not reflect taxes or investment/product fees or expenses, which would reduce the figures shown here.


You have already worked hard to develop your long-term plan. You have already charted your voyage and prepared your resources. Rebalancing is about keeping true to this approach. Rebalancing may lower your risk of not achieving your goals.

Many of us recall the market environments of the 1990s and 2000s when, similar to today, stocks performed well for long stretches of time. We’ve also seen those environments end in bear markets. In each case, employing a rebalancing strategy would have helped the investor mitigate some of the losses that may have occurred if the portfolio were left untethered. Over the course of the journey the portfolios, set to drift or rebalanced annually, carried similar returns but the portfolio that was rebalanced would have experienced smoother seas (i.e., less risk).

Reach out

Revisit your personalized advice with your Ameriprise advisor and explore your current asset allocation approach. Ask your advisor for ideas on when and how your portfolio can or should be rebalanced.

Investing involves risk including the risk of loss of principal.
In general, equity securities tend to have greater price volatility than debt securities. The market value of securities may fall, fail to rise or fluctuate, sometimes rapidly and unpredictably. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. Alternative investments involve substantial risks and are more volatile than traditional investments, making them more suitable for investors with an above-average tolerance for risk.

This information is being provided only as a general source of information and is not intended to be the primary basis for investment decisions. It should not be construed as advice designed to meet the particular needs of an individual investor. Please seek the advice of a financial advisor regarding your particular financial concerns.

An index is a statistical composite that is not managed. It is not possible to invest directly in an index.

Ibbotson Associates SBBI U.S. Large Stock TR Index
The IA SBBI U.S. Large Stock TR Index is a custom index designed by Ibbotson Associates to measure the performance of Large Capitalization US Stocks. This Index is based upon the S&P Composite Index From February 1970 to the present, the large-cap stock total return is provided by S&P Dow Jones Indices, which calculates the total return based on the daily reinvestment of dividends on the ex-dividend date. S&P uses closing pricing from stock exchanges in its calculation. Prior to February 1970, the total return for a given month was calculated by summing the capital appreciation return and the income return The capital appreciation component of the large-cap stock total return is the change in the S&P 500 index as reported by S&P Dow Jones Indices from March 1928 to December 2017, and in Standard & Poor’s Trade and Securities Statistics from January 1926 to February 1928.

Ibbotson Associates SBBI U.S. IT Govt TR Index
The IA SBBI U.S. IT Govt TR Index is a custom index designed by Ibbotson Associates that measures the performance of U.S. Treasury bonds with a maturity of five years.

Asset allocation does not assure a profit or protect against loss.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Ameriprise Financial cannot guarantee future financial results.

Investment advisory products and services are made available through Ameriprise Financial Services, LLC, a registered investment adviser.

Ameriprise Financial Services, LLC. Member FINRA and SIPC.