Risk and Rebalancing Your Portfolio

If you’re retired or you’re thinking about retirement –  making sure that your portfolio doesn’t drift away from how it’s supposed to be invested is important. It gives you slightly more control over what your investments do and can be especially effective if you’re realizing that you don’t need to go for the absolute maximum gains anymore for your plan to be successful. Typically, people want to take the least amount of risk possible but still have the highest chance of their plan being successful. 

So when is the right time to rebalance your portfolio?

Why Consider a Rebalancing Strategy Now?

So, you’ve been investing for years and you understand that there are periods where certain investments will go up and then periods where they may go down. And you know, that rebalancing is important, so that you don’t drift too far off that ideal investment mix that you need for our retirement plan to be successful.

Five to 10 years ago you may have been okay with not rebalancing knowing that over time investments tend to grow. And if you did nothing, the allocation might get more aggressive or, you know more towards growth. But at that time, you may not have needed to spend that money yet. There were years until you had to start thinking about that, and maybe you were okay with that.

But now in retirement (close to retirement), you might be looking for more predictability with your investments. Rebalancing can be one of the strategies that helps with that.

But when’s the right time? Well, there are really two schools of thought here.

Time-Based Rebalancing

The first strategy is called time-based rebalancing. Typically, this is the more common approach and happens at a certain time of year (usually annually or quarterly). Rebalancing helps get you back to the original allocation of your investments that drifted a little bit during that period of time. And yes, rebalancing can be good,  but you may be missing opportunities throughout the year. 

For example, say that you rebalance on January 1st every year. But then, in March or April, you have an opportunity to tax loss harvest and actually lower your tax bill – but you don’t do it because it’s not January 1. 

One potential solution to this is to take advantage of those fluctuations that happen throughout the year. This is called trigger-based rebalancing. 

Trigger Based Rebalancing

This is a different rebalancing strategy that when certain events happen throughout the year you’re alerted so that you can update your portfolio. 

Let’s pretend (as an example) that an international fund has a trigger when it’s out of whack by 10% (either down 10% or up 10%). Well, when the trigger is switched, you can get the portfolio back in line. This is the method that we prefer at Streamline and that our clients get the most benefit out of. 

Emotional Financial Decisions

A lot of people know all about the importance of rebalancing, tax-loss harvesting, asset allocation, and other strategies implemented throughout the year. But a big problem people face is actually implementing the strategies by themselves. It’s hard to be certain and confident that you’re making the right decision. This is because behind every financial decision, is an emotional decision as well.

Here at Streamline, we implement our investment system and call it the Streamline Investment System. We understand how important the emotional side of financial decisions is, and we’re able to talk with clients through them. But we also choose to follow a system, which is typically more logical and unemotional – making it possible to make financial decisions and monitor our emotional involvement in them. 

Even if you don’t use our system, it’s important to write down and implement a system of your own. 

DIY Rebalancing

If the trigger-based system seems like too much work for you, consider the time-based rebalancing strategy, and rebalance once per year. That could be a system that you end up following. 

Here are a few tools to take a look at that might assist you if you enjoy learning and implementing these sorts of strategies by yourself. 

Personal Capital is a rebalancing tool that can help determine when to rebalance. 

Here is another tool from Rob Berger.  This is his portfolio tracking spreadsheet that can give you an idea of when to rebalance your portfolio.. It has a column to indicate when things get out of whack and when to rebalance. 

So I know when talking about investment strategy it can be a lot to take in. And there are a lot of people who choose not to do all these investment and tech strategies that they have available to them that could improve their plan but they still end up doing just fine.

Defining and Investment Plan + Implementing It

Talk about investment strategies can be a lot. And there are many people who choose to not implement the investment or the tax strategies that could improve their plan –  and they end up doing just fine.
But if you are thinking that there might be some strategies that you can use to optimize what you’re doing with investments, tax planning, and withdrawal strategy –  you’re always welcome to reach out to us.