Citi Personal Wealth Management

Giving Your Money a Checkup:
Has Your Portfolio Lost
Its "Balance"?

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The following content is complex, and you should consult an expert about this topic.

A few years ago, you might have been comfortable with your mix of investments. That does not mean you should still be comfortable today, particularly with the impact of the pandemic on the markets.

The fact is, even if you haven't made any trades, and even if your appetite for risk hasn't changed, there is a good chance your portfolio looks quite different from the investment mix you bought a few years ago, or even just a few months ago. The reason: As some investments may have soared and others may have slumped, you could find you now have far more invested in some asset classes than you intended and far less in others.

What to do? It may be time to rebalance.

Staying on Target

When you first built your portfolio, you might have settled on target percentages for each asset class. Let's assume you started with a balanced portfolio consisting of 60% stocks and 40% bonds.

The stock market then tumbles 20%, while bonds rise 5%. Not only would your portfolio's overall value slip 10%, but also your stocks would be down to 53% of your investment mix. To rebalance your portfolio, you would need to shift money into stocks to get back up to 60%. If stocks continued to decline, that would hurt returns. But if stocks rebounded, you would likely benefit, because you would then have more invested in stocks.

But rebalancing should be viewed primarily as a way of managing your risk. If you didn't rebalance during a rising stock market, you would likely find that more and more of your portfolio was invested in stocks and you could get hit especially hard when the next bear market strikes.

You might also rebalance within your stock–market investments and within your bond–market investments. Imagine that you had initially split your stock portfolio between 70% U.S shares and 30% foreign companies. To maintain those targets, you might add to U.S stocks when they're suffering and trim back your foreign stocks when they have had a stretch of stronger performance.

This, again, should primarily be viewed as a way of managing risk. Still, unlike rebalancing between stocks and bonds, rebalancing within your stock portfolio and within your bond portfolio may be less likely to hurt returns—and it might help.

Take the strategy of rebalancing between U.S. and foreign stocks for example. If you regularly add to the stocks that are lagging and lighten up on the stocks that are faring well, you might find yourself buying low and selling high. Assuming U.S and foreign stocks generate similar long–term results, this buy low–sell high strategy may enhance your returns over the long haul—although, of course, there are no guarantees.

A few years ago, you might have been comfortable with your mix of investments. That does not mean you should still be comfortable today, particularly with the impact of the pandemic on the markets.

Bucking the Trend

Be warned: While rebalancing may sound easy, it can be mighty tough in practice. You need a strong stomach to buy into depressed markets that other investors are fleeing. That's why it is important to think carefully about your target portfolio percentages—and whether you will be able to live with them in good times and bad.

How often should you rebalance? This is a matter of some debate. Some people like to keep it simple, rebalancing once a year or once a quarter.

Others look to rebalance only when their investments are significantly above or below their target percentages. For instance, if you have 20% of your overall portfolio earmarked for foreign stocks, you might only rebalance if their value rises above 25% of your portfolio or falls below 15%.

Beware of the risks of holding all your eggs in one basket. There's always the risk that a company falls in value-and potentially faces bankruptcy. Recent examples include JC Penney, Hertz, and GNC to name a few. Rebalancing may make more sense with diversified investments, such as mutual funds and exchange–traded index funds. Such investments may help prevent catastrophic losses from concentrated holdings through the power of diversification.

As you contemplate tweaking your portfolio, also give some thought to trading costs, which will eat into any gain from rebalancing. If your investment trading costs are high, you may want to rebalance less frequently.

Taxes are another cost you may want to consider. While rebalancing within a retirement account — shifting from one investment to another — doesn't trigger any immediate taxes, selling in a taxable account could unleash a big tax bill.* Indeed, if you need to rebalance within your taxable account, you may want to try to avoid selling investments with large capital gains.

Instead, to get your portfolio back into balance, consider directing any dividends, interest and new savings into those asset classes that have fallen below your target percentages.