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Portfolio Rebalancing: Reduce Volatility in your Portfolio

Many investors prefer to invest more aggressively at younger ages and more conservatively as they approach retirement age.

Portfolio rebalancing means selling and buying the necessary securities to bring the value of each allocation in a portfolio back to the level established by an investment plan. Rebalancing involves adjusting investment choices to make sure your portfolio is on track to reach financial goals, and needed because changes in the market can throw off expectations for certain assets.

How often you rebalance depends on your investment goals, risk tolerance, and financial needs.

You should first take a look at your asset allocation -- usually stocks and bonds -- but can include cryptocurrencies, real estate and cash. If a portfolio had an asset allocation of 45% stocks and 65% bonds, then keeping that balance may be necessary to fund future financial goals.

Portfolio rebalancing can be done by either selling one investment and buying another or by allocating additional funds to either stocks or bonds. The money earned in stocks can be used to reallocate into bonds to maintain your original asset allocation.

All investors should consider the costs of each transaction involved in a rebalancing before deciding how often or when to rebalance. For many, once per year is sufficient, depending on market volatility. Investors with shorter-term goals may wish to rebalance more frequently to be sure they stay on track to meet those goals.

Selling investments from a taxable account that’s gained value will likely mean you’ll owe taxes on the realized gains. To avoid this, you could rebalance within your tax-advantaged accounts only.

A second option to prevent a tax hit is, if possible, an investor can use new money into the portfolio to buy into the other asset classes.

A third, and riskier option, is to use expected capital losses to offset gains from an asset class. The key is that the losses have to occur during the same tax period that the gains did and is best done with professional guidance.

When rebalancing your portfolio, maintain focus on your long-term goals. The act of rebalancing has the added benefit of helping you take advantage of opportunities to buy low and sell high, increasing overall profits.


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