Welcome to the new morningstar.co.uk! Learn more about the changes and how our new features help your investing success.

Rebalancing Your Portfolio

You'll need to monitor your portfolio to ensure it stays in line with your investment goals

Morningstar.co.uk Editors 11 July, 2013 | 9:00AM

So you’ve built a portfolio that perfectly matches your needs. If only you could kick back and ignore it until retirement. In order to keep your portfolio in shape, you have to monitor it on a regular basis. You’ll want to reevaluate all of your funds and make sure that you don’t have a reason to sell any of them. You’ll also want to make sure that your asset allocation hasn’t become lopsided—and if it has, you’ll want to rebalance your holdings. In this lesson, we’ll examine why rebalancing matters and offer our suggestions for how and when you should rebalance your portfolio.

Why Rebalance?

Say that you originally constructed a portfolio of 60% stocks, 30% bonds and 10% cash. If left alone over a 20-year period, that portfolio could easily morph into a blend of 84% stocks, 13% bonds, and 3% cash. Presumably, you set up your original allocation to match your needs and your risk tolerance. If neither has changed, your allocation shouldn’t either. For example, if stocks take over your portfolio (as they did in our example), your returns may rise but so will your risk. Moreover, you may find yourself with insufficient cash on hand to meet short-term needs. The only way to return the portfolio to the original risk level is by buying and selling funds until you reach your original allocation. That’s what rebalancing is.

Our Rebalancing Principles

The prospect of frequently rebalancing your portfolio can leave you reeling. Relax. Rebalancing your portfolio doesn’t have to be a juggling act if you follow our guidelines.

Don't rebalance too often: You needn’t worry about rebalancing every quarter, or even every year. Morningstar has found that investors who rebalanced their investments at 18-month intervals reaped many of the same benefits as those who rebalanced more often. Moreover, investors who rebalance less frequently save themselves unnecessary labour and, in the case of taxable investments, a good bit of money. That’s because rebalancing requires paring back the winners, which means realising capital gains and, for the taxable investor, paying the state. We’re not saying you should only look at your portfolio every 18 months—in fact, we think you should monitor your portfolio regularly to watch out for manager or strategy changes at your individual funds. But resist the urge to tinker unless one of your funds has significantly changed its strategy.

If you rebalance just one thing, make it the stock/bond split: Your cash and bond stakes are vital to keeping your portfolio’s risk in check. Because bonds don’t generally move in sync with your stock investments, a simple strategy of restoring your cash and bond funds to their original weightings every 18 months will dramatically lower your portfolio’s overall risk.

Rebalance sub-asset classes and investment styles by the numbers: Like any good concept, rebalancing can be taken to extremes. Some investors follow very detailed asset allocations that involve, say, putting 20% of their portfolio in large-growth funds and 15% in small-value funds. They then rebalance when the large-growth/small-value allocation gets out of whack, as well as when their overall stock/bond/cash allocation goes awry. That stock/bond/cash allocation clearly should be your rebalancing priority, as we’ve pointed out. When it comes to sub-asset classes or investment styles, we’ve found that readjusting whenever one style takes up one quarter more or less than its original portfolio position can be an effective strategy. For example, you’d want to rebalance when the fund to which you devoted 20% of your portfolio rises to 25% or sinks to 15%.

Use new money to restore balance: Taxable investors take note: When adding fresh pounds to your portfolio, add to your laggards to avoid the tax consequences of selling your winners. If you don’t have new money to put to work, consider having your funds’ income paid into a money market account, then using that cash for rebalancing.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.

Audience Confirmation


By clicking 'accept' I acknowledge that this website uses cookies and other technologies to tailor my experience and understand how I and other visitors use our site. See 'Cookie Consent' for more detail.

  • Other Morningstar Websites