Investing Basics

Understanding the Basics of Portfolio Rebalancing

by Jessica Keus Investment Advisor - Wellington-Altus Private Wealth


After this past year, we are all in search of some kind of balance. Whether it be the highly sought-after work-life balance, or just the balancing act of managing our varied relationships. There are many solutions available to strive for this balance including meditation, a new hobby or even a change in your schedule, but, these remedies likely won’t be helpful when trying to balance your investments, especially after the quick and positive turn in the markets we have noted recently. Understanding the fundamentals of portfolio rebalancing helps maximize your returns and minimize your risk.

How do I Find Balance by Rebalancing?

Rebalancing is the act of periodically reviewing the asset allocation in your portfolio and, if the balance is “off” from your original intention, then investments are reallocated to ensure your portfolio is restored to your original goal.

Risk Rewarded

Often times, an unbalanced portfolio can occur when markets outperform or underperform expectations. These swings can be welcomed in up markets, but can pull your portfolio off balance, and more importantly, may inadvertently expose you to much more risk than you had originally intended. It may seem counterintuitive to sell your “winners”, but this is an indication that your risk reward has paid off, and this gives you the opportunity to once again “buy low and sell high”.

To illustrate this, here is an example:

  • You decide to invest in a growth portfolio holding $70,000 in the S&P 500 index and $30,000 in bond funds. Your desired asset allocated is 70% stocks and 30% bonds. Over the next couple of years, your stocks have a great run and have doubled, but your bonds have only gained 20%.  The stock portion of your portfolio is now worth $140,000 and the bond portion of your portfolio is worth $36,000.
  • Your entire portfolio is now worth $176,000, however, your asset allocation is now almost 80% stocks and 20% bonds, resulting in you taking on more risk than you had originally intended.

Where is my Crystal Ball?

If we all had one, my job certainly wouldn’t exist, and we would likely all be enjoying a cocktail on a fancy yacht somewhere. But without one, the best you can do is to check your emotions at the door and return to your original intent and comfort level when it comes to risk. Clients are often comfortable with increased risk when their portfolios are up, but it is important to find your way back to a comfortable risk balance that will sustain you through down markets as well.

When to Assess Your Balance

Calendar Reviews: Advisors will often decide to rebalance on a timed structure be that quarterly, semi-annually, or annually.

5% Rule: If your portfolio deviates out of balance by a certain percentage from the original intended goal, your Advisor may determine it is time for a review.

Automatic Rebalancing: Advisors can recommend turn-key solutions that offer an automatic rebalancing structure built into the portfolio. This approach takes manual intervention out of the equation, and allows clients to benefit from knowing that their portfolios will always be in balance.

Always remember that:

  • There are pros and cons to the above approaches that your Advisor will be happy to discuss with you.
  • It is worth noting how important a discussion regarding rebalancing your portfolio can be, especially in times similar to what we have noted in 2020.
  • You should and must consider capital gains when rebalancing your portfolio if some or all of your investments are held in a non-registered account. Selling investments that have performed well will trigger a taxable event.
  • Transaction costs may apply to your rebalancing strategy and checking with your Advisor in advance is key.

Take it Personally and Make it Personal

Market events are not the only factor that may call for a rebalancing of your portfolio. Based on your stage of life, time horizon to invest and your current risk tolerance, are the goals you originally set out for your portfolio still appropriate? As these factors evolve through your investing lifetime, so should your thoughts regarding portfolio balance. Having any of these factors change will result in the need to have a discussion regarding rebalancing and the forward thinking strategy for your portfolio.

Maintaining balance in life and in your portfolio are equally important, and often change will be the driver pushing the conversation. A change in your life or a change in the markets can both result in a change in your portfolio objectives, and acknowledging and responding to these changes will bring the peace of mind and balance that you desire and deserve.

The information contained herein has been provided for information purposes only. The information does not provide financial, legal, tax or investment advice. This does not constitute a recommendation or solicitation to buy or sell securities of any kind. Market conditions may change which may impact the information contained in this document. Wellington-Altus Private Wealth Inc. (WAPW) does not guarantee the accuracy or completeness of the information contained herein, nor does WAPW assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. WAPW is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

Jessica Keus
About Jessica Keus

Jessica is an Investment Advisor with Wellington-Altus Private Wealth in Winnipeg, Manitoba. She was recently named one of Wealth Professional Magazine’s Rising Stars of 2020, the 24 next big names in Canada’s wealth management industry. With clients across the country, Jessica places a focus on relatable wealth advice and client choice. To connect, e-mail Jessica at [email protected] or by social media on LinkedIn, Instagram and Facebook.

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