The idea of investing your hard-earned savings can sound intimidating, like something you’d only do with a specific retirement account or if you’re a big shot on Wall Street.
But just because investing can be a little confusing doesn’t mean you should avoid it. In fact, the sooner you start investing for retirement, the more time your money has to grow.
While there can be ups and downs, in the long run, a diversified investment portfolio—which means you put your money in a range of different assets—has a much higher return than putting your money in a bank savings account where you can set it and forget it.
It’s important to understand the fundamentals of investing: building a portfolio and portfolio rebalancing. Use SoFi’s investment resources to get some background information on investing basics and strategy overviews.
A simple off-the-shelf portfolio or mutual fund, which is a diversified collection of stocks, bonds, securities, and assets, is a simple investment approach. Once you have an investment portfolio, you’ll be faced with the question of how often should you rebalance your portfolio—which can also be as complicated or as simple as you want.
What is Portfolio Rebalancing?
A portfolio is your collection of investments—stocks, bonds, mutual funds, or even commodities and real estate. The allocation of those assets should be made with individual risk tolerance and financial goals in mind.
If you want to be conservative, then you might go for a less risky portfolio. If you are many years away from retiring, so won’t need to pull your money out of your retirement investments soon, then you might be comfortable with a bit more risk.
Over time, however, the different assets have different returns/losses and so the amount of each asset changes—one stock or fund might have such high returns it eventually builds up to be a larger portion of your portfolio than you want.
For example, if you’re aiming to have 70% stocks and stock prices go up drastically over a quarter, you might end up with 80% of your portfolio’s value being held in stocks. That’s when it could be time to rebalance.
Portfolio rebalancing is just a fancy way to say adjusting your investments. It means you change the asset allocation of your portfolio to return to your desired portfolio make-up.
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Why You Should Rebalance Your Portfolio
It might be tempting to think that if a specific asset has outperformed, then you’d want to keep a higher portion of your portfolio in that asset—and not rebalance.
Remember, the asset allocation of portfolios is based on a risk-to-return tolerance. A diversified portfolio spreads your investments out across different assets so that if one asset goes down you have the opportunity to balance it out.
Portfolio rebalancing also gives you a good opportunity to review your portfolio and the various funds or assets you’re invested in. Is this still what you want to be invested in? In addition to simply looking at asset classes, you can look at specific funds. If one fund now makes up a larger portion of your investments, do you want to adjust?
One caveat: Some funds, such as target date funds, are designed to change their asset makeup over time. These funds still need to be rebalanced to accurately reflect the desired asset allocation at any specific point, but the fact that they typically shift, over time, to a less risky investment strategy isn’t necessarily something that needs to be adjusted—after all that shift towards a target date is the point of a target date fund!
How Often Should You Rebalance Your Portfolio?
Portfolio’s can be rebalanced at set time points (quarterly, monthly, annually) or at set allocation points (when the assets change a certain amount). A good rule of thumb is to rebalance when an asset allocation changes more than 5%—ie. if a certain subset of stocks changes from 15% of your portfolio to 20%.
Rebalancing by set asset targets is a good way to approach your portfolio rebalancing since markets can change more in some time periods than in others.
Multiple studies have correlated the frequency of checking in on your portfolio with market losses over time—because the more often you check it, the more often you stress about small ups and downs, and then more likely you are to pull your money out when you shouldn’t.
Another way to know when to rebalance your portfolio is to set specific times to do it—ie. every quarter or at the start of the year. One study from Vanguard found there was no meaningful difference in risk-adjusted returns if the portfolio was rebalanced monthly, quarterly or annually—especially if you take into account the costs of doing it yourself with transaction fees.
For a lot of people, it makes sense to use the end of the year as a time to examine their financial investments and look at any potential changes coming in the new year.
The downside of rebalancing at set calendar appointments is that you risk overdoing it. Just because it’s on your schedule doesn’t mean you necessarily have to rebalance if the asset allocation hasn’t fallen outside of your set range.
How often to rebalance portfolio also depends on how involved you want to be and what stage of life you’re in—maybe those closer to retirement will want to rebalance more frequently as a risk avoidance strategy.
How to Rebalance Your Portfolio
So you understand you need portfolio rebalancing and you know how often to rebalance your portfolio, but know you want to know: How to actually do it?
You can do portfolio rebalancing yourself—sell some assets, buy up some others. Most online brokerages allow you to buy and sell on your own for minimal fees. While lots of people like to be involved and actively manage their portfolio, the other downside is that active trading can obviously cause you to buy and sell at the wrong time.
One study from JP Morgan found that if investors had stayed fully invested in the S&P 500 (one of the most commonly used weighted market indexes) from 1993 to 2013, then they would have had a 9.2% annual return—but if they missed even just a handful of the biggest days because of trades then that return drops nearly 4%.
All that is to say too much active involvement and trading could have a detrimental effect.
The other option is to set up your account to do it automatically. You could set your portfolio to have an asset cap, which means you would be notified when it shifts more than 5% from your desired allocation.
You can also set some funds to auto-rebalance when the allocation hits those target points or at set times—though you should still take the opportunity to review your portfolio yourself.
SoFi invests in exchange-traded funds (ETFs), which are a type of mutual fund. Those ETFs are then used to build a diverse portfolio of assets across international and domestic stocks, bonds, and real estate.
With SoFi’s automated investing, it starts by helping you set goals and determine a portfolio mix to achieve those goals, with automatic portfolio rebalancing monthly.
Any new cash, deposits or distributions from investments, is first applied to the asset or asset classes that need it most, and any assets that move more than 5% off target are automatically rebalanced.
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