What Does it Mean to a Rebalance a Portfolio?

Whether you’re a beginner, advanced or even an aspiring investor, you’ve likely heard that you should rebalance your portfolio. But what exactly does it mean? The overall notion of rebalancing is likely far easier to understand than you expect, but it is still a complex issue. Essentially, it’s important because it helps you insure that your money is invested in vehicles that you think will help you make more money, whether it be in the long run, or the short term. Let’s dive in.

What Is a Balanced Portfolio?

A balanced portfolio has a mix of investments that you’ve decided on based on your goals and risk tolerance. However, there’s no single way to balance your portfolio because everyone’s needs and desires vary.

For example, if you’re young and simply want to start saving for your  retirement, your portfolio might look similar to someone who is nearing their own retirement. However, if you’re young and are saving to buy a home in a few years, you’ll want your portfolio to be a bit more aggressive.

There is one simple thread between all balanced portfolios though, and that’s diversification. You need to have some safe investments, like treasury bonds and some riskier investments like real estate.

Now, if you’re thinking, “These are just a lot of words. How do I even start a portfolio?”

Well, a portfolio isn’t a physical thing you have. Its simply the collection of your investments. 

How Do You Rebalance Your Portfolio?

To rebalance your portfolio means that you reallocate funds to different places. Ideally you should be rebalancing your portfolio ideally every 3-6 months, the minimum should be once a year.

I’ll explain how I do it. 

I use the app Acorns to invest my spare change. Initially, I wanted a conservative portfolio to simply grow long term. Over the course of a month, my initial $30 investment paid dividends of 2 cents. Then, I decided I have the risk tolerance to be aggressive, so why not give that a try? I changed my preference and Acorns automatically rebalanced the portfolio for me. Within another month, my portfolio had lost more that the 2 cents it made, BUT it also made back $1, which was far more than the conservative approach.

That’s one example of how to rebalance your portfolio simply by working with a company who will do it for you. The other advantage to this strategy is that, since $30 obviously isn’t enough to buy stock in all areas of which I’m invested in, they allow you to buy a percentage.

Meanwhile, if you’re a do it yourself investor, then you have a little more work cut out for you. For example if you bought a lot of stocks but want to be more conservative now, you’ll need to sell those stocks, pay any taxes on your gains and can then invest the money in bonds, etc.

This is why many people have a financial advisor help them out when it’s time to rebalance, even if they haven’t been doing it on their own. Someone who has done this for years can tell you what’s lacking in your investment strategy and how to fix it.