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Why Rebalancing Your Portfolio is Like Buying a Carton of Eggs

Rebalancing your portfolio

Who out there has bought a carton of eggs? I know that I have, and I am sure many of my readers have as well. It’s an everyday item in many a shopper’s cart. It’s so common that some may do it without thinking and thus could do it in their sleep. Like my son, for example, there’s a reason we call him “Clucky” – the boy loves eggs! We’re constantly buying them. Enough so that we’ve discussed many times how much money we might be able to save if we bought a few chickens. My question to you is ‘what is the first thing you do before putting that carton of eggs in your cart?’ If you’re like me you open the carton to see if all of the eggs are in good shape. You may ask what buying eggs has to do with rebalancing your portfolio, well it actually has a lot to do with it and the same checking mentality is vital to your overall investing health.

Check Before You Buy

 

For most of us, we’re not getting our eggs locally or fresh like some might be and as a result they’re shipped to whatever grocery store it is you buy them from. Eggs, like stocks, are a fragile thing. They can be altered by minor circumstances and can simply be unusable, or in the case of an investment not worthy to be held any longer. In regards to stock investments, or any investment for that matter, the slightest change or news item can alter its performance for some time. Left unchecked, this has the potential to put a good crimp on your investment portfolio. This is why so many in the personal finance world espouse the importance of rebalancing your portfolio annually so you can see what’s still a worthwhile holding and what should be thrown away.

Balance is Everything

 

I know some may argue that eggs are not good for your health, but I think they’re fine within moderation. Having a healthy well balanced diet is key to leading a healthy lifestyle and eggs are certainly a part of that. The same may be true of certain stock holdings in your investment portfolio. I’ve written about risk tolerance before and that is exactly why rebalancing your portfolio is vital to having a well-balanced investment approach. When it comes time to rebalance your portfolio it’s the perfect time to revisit your risk tolerance and see if your portfolio is out of balance. As the market ebbs and flows throughout the year, it’s highly likely that your portfolio is a little out of whack and needs some fine tuning to get back to an appropriate balance.

Rebalancing Your Portfolio is Key to Your Overall Investing Health

 

I know that rebalancing your portfolio is not sexy by any means and many bloggers worth their salt have written about it. The very reason why so many have written about is that it’s of utmost importance to your long term investing health. In many instances, like in your 401k, rebalancing your portfolio is extremely simple. Most 401k plans have a nice feature that allows you to rebalance annually with no work required from you. How easy is that? As stated previously, the stock market moves in various directions throughout a year. What started out as a 20% holding in a large cap fund might end the year as a 22-25% holding. While you might think that change is small, it affects your portfolio as a whole and left unchecked, can alter the path of your overall investment portfolio. Over many, or even several years, that can take your portfolio to places you had not intended.

To be clear, I am not suggesting you rebalance your portfolio too regularly as that could have ill effects as well. Most will suggest that you should be rebalancing your portfolio semi-annually at most or more likely on an annual basis. Especially for stock investments held outside your 401k, annual rebalancing will have the added benefit of keeping costs lower. Think of rebalancing your portfolio as a tune up that will better prepare your investments to grow over the long haul.

 

Do you like rebalancing your portfolio annually, or is it something you get to when you can?

 

 

 

Photo courtesy of: Claudio Jule

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I'm the founder of Frugal Rules, a Dad, husband and veteran of the financial services industry. I'm passionate about helping people learn from my mistakes so that they can enjoy the freedom that comes from living frugally. I'm also a freelance writer, and regularly contribute to U.S. News & World Report, Personal Capital, Daily Finance and more. If you're wanting to learn how to monetize your blog, check out my blog coaching services to see how I can help you take your site to the next level.

47 Comments

  • Good tips, John, and I have to agree that re balancing makes sense every once in a while. I haven’t looked at my 401k for probably six months or so. December or January may be a good time to do it with the end of one year and the beginning of another.

  • I haven’t looked at our accounts recently but it is something that we check in once or twice a year.

  • Pauline says:

    I like the analogy, especially to check before you buy. I don’t do stocks, just index. As I try to remove emotions, I have 4 index at 25% each. I am having someone to make the eggs for me :)

  • Thad says:

    It isn’t sexy, but it surely is important. Thanks for pointing out the difference between doing this too frequently and doing it intentionally.

  • Haha, it’s a funny comparison. Eggs. Well played, well played.

  • I like many who do not payy much attention to our 401k put it on auto drive with the target fund dates…prolly not a good idea…but with the market downturn i was just hoping that the money was making peanuts if anything…

    • John says:

      A lot of people are in that same boat. I would be careful though that those target dated funds are in things you really want them to be. There are some out there that aren’t exactly what their name might suggest.

  • I check my accounts on a regular basis and re-balance annually. There was a time when I re-balanced every 6 months, but as you indicated, it didn’t work very well. Since I have aggressive investments, I just have to let them run for the year and then re-balance.

  • Jason says:

    We rebalance our portfolios on a quarterly basis. I think annually isn’t often enough, but that’s just my opinion! Love the comparison though!! Careful with those eggs though, they contain a lot of cholesterol!

    • John says:

      Yea, it does come down to a personal opinion in terms of how often you do it. The reason why I don’t do it quarterly is to keep costs down. But, if something is way out of whack I might make a change. My wife’s old 401k would only allow quarterly rebalancing and would then hit her with fees to do so, they were defeating the purpose.

  • CF says:

    I haven’t actually rebalanced my portfolio yet, ever. While I know that it can be beneficial, I don’t think I have enough money socked away to make it worth it, yet.

  • Jennifer Lynn @ Broke-Ass Mommy says:

    I like to keep a keen eye on investments and try to maintain quick quarterly checks. Also it is important to invest in assets and stocks you believe can weather a pounding from irrational markets. That way even if there is a hairy dip, you will still plod along faithfully, and even seize opportunities to buy further shares of solid companies on the cheap.

    • John says:

      That’s a great way to look at it Jennifer! I probably check in 2-4 times a year and really only make changes once or twice if need be. I purposely keep some cash on the side in order to take advantage of some stocks that might be on “sale”.

  • My portfolio is in my work 401k and a Roth IRA. I haven’t met with my advisor in years, which means I should probably shop for a new one. But I also haven’t put any money in the Roth in a while (due to an extremely tight bidget!). But everything you stated makes sense. That’ll be a 2013 goal for me to do early in the year.

    • John says:

      Do you handle your Roth through an advisor or an online brokerage Jacob?

      I can relate to not putting much in a Roth as we’ve been a bit limited this year but hope to see that increase in the coming year.

  • I do ours every year and its a pain in the tush for me and yes, I’ve blogged about it.

    Keeping the right allocation for you is more important than the stocks or bonds you own!
    Interesting egg analogy.

    • John says:

      That’s great you do it every year Marie! I would agree that having that right fit in terms of allocation is more important than what you own.

  • Love the analogy! Wish I could write like that.

    In regard to investments all of my money is currently invested in real estate and oil & gas and is not accessible. But in reading so many other posts I have become interested in dividends and need to do more research on how that works and what I need to do to get started.

    • John says:

      Thanks Sicorra! Thankfully my wife is a writer and can easily help me with analogies. It sounds like you have a great foundation being in oil and gas as well as real estate. Getting into the stock market will bring you some great asset diversification which should help you in the long run.

  • K.K. @ Living Debt Free Rocks! says:

    I tend to look at my investments bi-annually at the minimum to see the returns and also, and whether I should change the % of my allocation and/or change the allocation altogether (based on forecasting and potential change in company direction etc…). Too many people just pour money into their 401k’s or RRSP and other investments and figure it’ll grow on autopilot…big mistake in my opinion.

  • We meet with our advisor once a year and go over our portfolio to see how it has been performing as well we keep an eye on it through the year. We put our faith in our advisor but realize no one has that crystal ball. I hope one day to be able to do some investing on my own. Mr.CBB

    • John says:

      That’s a great way to handle it Mr. CBB! So, is everything managed for you then and he handles it all? I agree that no one has a crystal ball, though it would be nice. ;)

  • Nice post, for clients with a 401(k) account I generally have them set it to be automatically rebalanced semi-annually. If we make permanent allocation changes in the interim it can always be reset and rebalanced manually.

  • FI Fighter says:

    Good reminder. It’s a good idea to keep tabs and re-balance the portfolio from time to time. I actually do this regularly with my taxable portfolio. For the 401k, my company uses target retirement funds which kind of self-balance themselves, so the allocation to bonds increases gradually as you get older. I would recommend target retirement funds to those who don’t want to follow their accounts regularly. I kind of like investing as a hobby, so I don’t mind.

    • John says:

      I agree that keeping tabs is important. I do the same with my taxable portfolio as well. Target dated, or index funds can be a great tool for those who do not have the time to manage appropriately.

  • Veronica @ Pelican on Money says:

    Interesting comparison – one I haven’t seen before. You must have been hungry :) Yikes.. well I don’t have a 401k so no balancing for me.

  • Justin@TheFrugalPath says:

    I’ve also heard experts say that by rebalancing you tend to sell stocks at their peak and buy others when they’re cheaper. Thus in the end you can make more money because the less loved ones might go up while the ones at the peak might dip or begin to slow.

  • I’m rebalancing for 2012 and it’s a big task. I just rolled over my 401k and it’s kind of hard to invest when there are so many uncertainties coming up.

    • John says:

      I hear ya Joe, it can be difficult to know what to put your money into without knowing what Washington is going to do over these next few weeks.

  • I love the egg analogy. It makes a lot of sense. Things change quickly so regular analysis and re-balancing is very important. This is the first year I’ll have to look at it seriously, since before this I had little in the way of investments.

  • I don’t think(and a lot of studies have shown) that rebalancing may not have as large of an impact as once thought. But I do think it’s important because it forces you to review your financial accounts once or twice a month and more importantly assess your AA.

    • John says:

      I’d be interested to see some of those studies Harry as I’ve read that it’s as important as ever and still can have a decent impact on an overall portfolio. At the very least, like you said, you need to be mindful of looking at it to make sure the AA is where you want it.

  • My accounts are rebalanced quarterly based upon my preset asset allocation. Together with dollar cost averaging, rebalancing allows me to take advantage of market volatility buying more shares when prices are low and less when prices are high.

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