Why, when and how to rebalance your portfolio

As the economy transitions from COVID recovery to expansion, it might be time to rebalance your portfolio. Not sure how? Consider the following.

ELI5: In rebalancing your portfolio, you can reassess the weight of your portfolio. If one area is too large, moving money into another helps manage risk.

Think of your portfolio as a pizza and each “slice” as areas of investment — stocks for growth and bonds/cash for security.

• If your stocks perform well, your stock portfolio will get larger and you may be taking on more risk than you’d like.
• If your bonds/cash slice get too big, you might fall behind your growth goals.

When to rebalance? At least once a year, or if unexpected market swings (i.e. COVID) shake up your portfolio and consider the following tactics:

• Calendar rebalancing: Set recurring dates to check your portfolio and adjust as needed.
• Constant-mix strategy: Give each asset a target size and leeway to shrink/grow. Once a slice becomes too big, rebalance as needed.

Keep gains by ditching pains: If you held Bitcoin in 2020, your crypto portfolio would’ve been quite big at the start of 2021. Selling a portion then would’ve saved your portfolio from a lot of volatility as crypto crashed throughout the year.

But rebalancing too much might not be a good thing due to:

• Capital gains taxes from selling outside a tax-free account.
• Transaction costs, which add up quickly from rebalancing too frequently.

Actively managed ETFs and mutual funds automatically rebalance holdings within the fund. But when it comes to allocation between individual stocks or assets, investors will have to be more hands-on.