Spring has officially arrived. This past winter was a particularly harsh one for most, making Spring days a welcome change. The longer warmer days also prompt gardeners with their annual seasonal prep ritual. These rituals typically revolve around Autumn left over clean up, dividing perennials, pruning trees and adding fresh mulch.
In many ways, portfolios are no different from gardening. So much effort goes into proper design, development and implementation, yet without proper tending, portfolios can grow unwieldy, full of riffraff and possibly subject to undue risks.
Portfolio management entails many aspects. These include monitoring economic and business cycle developments, oversight of investments and investment vehicles and periodically rebalancing.
Rebalancing is the process of buying and selling portions of your portfolio in order to set the weight of each asset class back to its original allocation. In addition, if an investor’s investment strategy or tolerance for risk has changed, he or she can use rebalancing to adjust the weightings of each security or asset class in the portfolio to fulfill a newly desired asset allocation.
The asset mix inevitably changes as a result of differing returns among various securities and asset classes. As a result, the percentage allocated to different asset classes will change. This may increase or decrease the risk of your portfolio.
A popular belief among many investors is that if an investment has performed well over the last year, it should perform well over the next year. Unfortunately, past performance is not always an indication of future performance—this is a fact many mutual funds disclose. Many investors, however, remain heavily invested in last year’s “winning” fund and may drop their portfolio weighting in last year’s “losing” fund, which will alter the original weighting. Remember, equities have historically tended to be more volatile than fixed-income securities, so last year’s large gains may translate into losses over the next year.
The optimal frequency of portfolio rebalancing depends on your cash flow, transaction costs, personal preferences and tax considerations, including what type of account you are selling from and whether your capital gains or losses will be taxed at a short-term versus long-term rate. Usually about once or twice a year is sufficient.
Rebalancing your portfolio will help you maintain your originally intended risk/return strategy and allow you to implement any changes you make to your investing style. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does. Rebalancing is easily dismissed, but rebalancing keeps your garden looking and performing as intended. This is something we follow religiously and complete either during your Reviews or at the appropriate moment for tax reasons, but never lose sight of its importance. Enjoy your coming Spring days and the warmer weather……and above all stay safe and have a wonderful weekend.