Learn About the Stock Market (Series): How To Rebalance Your Accounts

Learn About the Stock Market Rebalancing Let It Ride Toon

In our last session on Learn About the Stock Market, we defined Rebalancing.  This week, we are going to give you 5 tips on rebalancing your accounts.

How To Rebalance Your Accounts – 5 Tips

Rebalancing is one of your best tools to manage risk in your investments.  Follow these steps to ensure you are taking a systematic approach to meeting your goals.

  1. Rebalance Back To Your Original Intent – In the examples in my previous post, I used the simplest asset allocation strategy of stocks, bonds, and cash.  However, there are others such as sectors (financials, tech, etc), large cap/small cap, growth/value and so on. Whatever allocation you chose to start with, you should rebalance back to that allocation.
  2. Rebalance Yearly – If you have less than a million dollars in your accounts, you should rebalance yearly.  If you have more than a million, rebalance semi-annually.  Why?  One of the disadvantages of rebalancing is the fees you pay to buy and sell assets.  You can keep fees low by rebalancing less often.  However, once you reach the million dollar club, you will want to take as many precautions as you can to stay in the club.  Rebalancing will help you mitigate this risk.
  3. Automate your Rebalancing – Most 401k accounts have an option to rebalance automatically every year.  Choose this option and you won’t have to worry about this.  If you don’t have this option, you can use a target date fund (fund whose portfolio allocation is chosen based on the year you are going to retire) and the money managers will rebalance the funds for you.  If you have accounts outside of your 401k, then tell your advisor you want a yearly meeting to discuss rebalancing.
  4. Use cash and dividends – There are fees associated with buying and selling stocks, bonds and funds.  To avoid fees that you may be charged because you did not hold on to an investment long enough, use cash.  For example, if you hold some mutual funds for less than a year, you pay a 1% fee when you sell the fund.  One way to get more cash in your account is not not automatically reinvest your interest and dividends.
  5. Consider All of Your Accounts – If you have a mix of taxable and non-taxable accounts, make sure you are looking at your asset allocation across of of these accounts.  This is where a financial advisor comes in handy, because they have software to look at your allocation across all of your accounts.  Here is a tip, don’t forget your house as an asset.  I don’t buy any real estate funds in my investment accounts because my house is such a large part of my net worth.

I hope you found this latest installment in the Learn About the Stock Market series helpful.  If you have any questions the stock market, leave a comment below and I’ll work to address it in a future article.


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