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Rebalancing Your Portfolio Is Key to Successful Financial Planning

Brett Dusch


Determining a strategic asset allocation within a portfolio is one of the most important parts of investment planning. Sticking to that allocation requires consistently placing trades to ensure the portfolio meets your objectives and stays true to a risk profile appropriate for you and your finances. A proper allocation will determine both what assets and funds should be held, in addition to an appropriate percentage weighting for each. Sustaining that allocation over time through rebalancing is paramount to keeping your portfolio in sync with your investment goals.

Account rebalancing is necessary because portfolios will naturally deviate from their intended allocations over time. You can become unintentionally more aggressive or more conservative as capital markets and economic climates shift. Market movement in either direction will change the overall risk profile of your portfolio and result in you being more or less exposed to volatility than you likely intended at inception.

For example, suppose that large-capitalization domestic equities (U.S. Large Caps) make up 20 percent of your portfolio allocation. But those stocks perform well for two years, to the point that U.S. Large Cap weighting has grown to 30 percent of your portfolio. During the same period, fixed income and bond values fall, and their portion of the portfolio slips from an initial 45 percent allocation to 38 percent. By not practicing rebalancing, your portfolio’s allocation has shifted 17 percent from the performances of only those two asset classes. The portfolio has become significantly more aggressive and concentrated in equity-based holdings, increasing risk exposure beyond the initial weightings or targets you discussed and agreed on with your advisor. This portfolio will remain “unbalanced” until trades are placed to return it to the initial risk profile.

The ability to reallocate and strategically shift holdings within various asset classes has become increasingly more important considering today’s volatile markets and restless global economy. It’s safe to say that the next 10 years will not be like the last 10 years, so making concrete go-forward assumptions based exclusively on recent trends alone is not a wise course of action. Your portfolio should be rebalanced regularly based on forward-looking capital market assumptions; past market performance should have little or no impact on how your current and future portfolios are constructed.

While trading/rebalancing within qualified accounts (such as IRAs and 401ks) can mostly be done without tax ramifications, most taxable accounts will have realized gains and losses with each rebalance as assets are bought and sold. As these capital gains are recognized, they will be subject to tax. We look to grow our client’s accounts with tax-wise investments while ensuring they have proper volatility controls in place.

Periodic portfolio rebalancing is an important way we add value and help our clients adhere to their respective investment profiles. Properly executed tax-sensitive investment planning minimizes realized gains, and therefore reduces the resulting taxes. Yet, while tax planning should be a part of every rebalancing conversation, it is secondary to ensuring an allocation that’s designed and maintained to meet your objectives.

Periodic rebalancing is something your advisor should routinely discuss with you, because client risk profiles, goals, and portfolio needs change over time. We understand that life happens, and that adjustments in risk tolerance can change. By rebalancing our clients’ portfolios, we’re able to keep your risk level, financial goals, and portfolio needs aligned and consistent with what you need in your life.


The information included in this document is for general, informational purposes only. It does not contain any investment advice and does not address any individual facts and circumstances. As such, it cannot be relied on as providing any investment advice. If you would like investment advice regarding your specific facts and circumstances, please contact a qualified financial advisor.

Any investment involves some degree of risk, and different types of investments involve varying degrees of risk, including loss of principal. It should not be assumed that future performance of any specific investment, strategy or allocation (including those recommended by HBKS® Wealth Advisors) will be profitable or equal the corresponding indicated or intended results or performance level(s). Past performance of any security, indices, strategy or allocation may not be indicative of future results.

The historical and current information as to rules, laws, guidelines or benefits contained in this document is a summary of information obtained from or prepared by other sources. It has not been independently verified, but was obtained from sources believed to be reliable. HBKS® Wealth Advisors does not guarantee the accuracy of this information and does not assume liability for any errors in information obtained from or prepared by these other sources.

HBKS® Wealth Advisors is not a legal or accounting firm, and does not render legal, accounting or tax advice. You should contact an attorney or CPA if you wish to receive legal, accounting or tax advice.

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