The term “rebalancing portfolio” can mean many different things to different people. However, most definitions involve making the most of crucial investments, so you’re not leaving money on the table.
Rebalancing your portfolio involves examining your current holdings and ensuring they align with your long-term investment goals. The U.S. Securities and Exchange Commission says rebalancing every six to 12 months is a frequently recommended strategy. It ensures you have your eyes on the overall picture and are making the best decisions for your money.
However, far too many people skip this step. They think it’s too complicated, or it will take too long. With a bit of guidance, this doesn’t have to be the case. We’ll outline three crucial ways you can rebalance your investment portfolio, and we’ll explain why each one might be easier than you ever thought possible.
What to Consider When Rebalancing
Rebalancing a portfolio involves examining your holdings and ensuring your current approach is still working. You can’t perform this type of analysis without understanding what you’re looking for and why it matters.
The Corporate Finance Institute says the following factors are critical when you’re examining your asset allocation.
Your Goals
Why have you built up a portfolio? Every investor answers this question a little differently. Your reasons may be similar to the following:
To save for retirement
To leave a nest egg for your heirs
To avoid a different form of employment
To cushion future financial blows
For the fun of buying low and selling high
Because you’ve inherited assets and need to maintain value
The more you understand why you’re investing, the less likely it is that you’ll make emotional decisions that won’t further your goals. This check-in can help to keep you focused on your overall goals.
Your Risk Tolerance
Some investors feel perfectly comfortable placing a large amount of money in an asset that may or may not pan out. Others need to keep a close eye on profits and play it safe. Knowing where you are in this continuum can help you examine your assets clearly and make smart decisions. Once you define this tolerance level, other choices become clearer.
Your Time Frame
When do you need your assets to pay off? If you’re in your 20s and saving for retirement in your 60s, your strategy might change when you hit 50. Your time horizon can help you understand if an asset you’re considering will reach maturity when you need it to do so. You can also use this factor to determine how much risk you can take.
3 Rebalancing Portfolio Methods to Consider
The U.S. Securities and Exchange Commission explains that three rebalancing portfolio methods exist. If you’ve examined your assets and determined that you need to make a switch, you can use one (or all!) of these methods to correct the problem and make the most of your investments.
1. Sell Your Investments
Experts explain that you should date—not marry—your investments. If you’ve purchased an asset that just isn’t working as expected, and you’re sure the problem won’t get better with time, it could be a sign to sell.
Know that you’re not required to cash out of your investments. Smart investors sell one thing and buy another. This keeps them in the market.
But resist the impulse to hang onto an item in the fading hope it will one day pay off. If you’ve invested too heavily in something that isn’t working, it’s time to sell. Take emotion out of it and view it from a long-term business perspective.
2. Buy Different Investments
Once you’ve sold an item, take the money and invest it in something new. For example, you could shift your allocation from high-risk stocks to sure-bet real estate. A buy like this could provide big dividends in time, and you may sleep easier with a less risky investment choice.
The U.S. Securities and Exchange Commission warns that research is an important part of an investor’s homework. Don’t leap into the first opportunity you find. Dig deep into the data to ensure it will work as promised. If you don’t have time to do that work yourself, hire someone to do it for you.
3. Alter Your Contributions
Rebalancing your portfolio can mean examining how heavily you’re invested in different sectors and shifting your allocations. For example, if you’re routinely reinvesting your profits in bonds, perhaps that money should go into real estate instead. Similarly, if one of your stock accounts has done well, perhaps you should shift funds from a poorly performing account to this one.
What to Consider When Rebalancing
Shifting funds and changing strategies can be intoxicating. Think of the money you could make! However, it’s wise to examine any potential move carefully and proceed with some caution.
The U.S. Securities and Exchange Commission explains that some rebalancing methods (such as selling) can trigger tax fees and other consequences. Additionally, some investment firms charge fees for transfers, closing accounts, and more. Ensure that the steps you want to take won’t eat up all your profits.
A Rebalancing Portfolio Option to Consider: 1031 Transfers
If both buying and selling are part of your rebalancing strategy, you could use a 1031 transfer process to avoid a big tax hit. This can be one of the smartest investment moves you make.
IRC Section 1031 allows investors to complete a complex transaction with two (or more) properties. One is sold, and others are purchased. The taxes an investor would typically pay for the sale of the original property are rolled into the second. Those tax liabilities don’t disappear, but they’re delayed until you sell the other property (or properties). If you don’t sell, your heirs won’t be responsible for the taxes when you pass.
The properties involved in a transaction like this must be used for investment or business purposes. That means you can’t use a 1031 transfer to sell the family home or purchase a home you want to move into right away.
However, there are few other restrictions on the properties. That makes 1031 transfers ideal for investors with a large real estate portfolio.
Let’s use an example. You invested in a large office building in a major metropolitan area that hasn’t recovered from COVID economic downturns. When you examine your portfolio, you realize you’re too deeply invested in office spaces. You could use a 1031 transfer to sell your office building and purchase an apartment building in a different part of town. That shift could help you rebalance without a major tax hit.
Completing 1031 transfers takes time and expertise. Typically, you need outside help. For example, you must have a qualified intermediary who can hold the proceeds of the sale for you. Touching the money makes the transaction taxable.
At 1031 Pros, we specialize in helping investors complete these complex transactions. We can guide the entire process from start to finish and ensure you have all the paperwork you need when tax time arrives.
We ensure you take all the required steps correctly. You can rebalance your portfolio with confidence when you work with us. Contact us to get started.
References
Is It Time to Rebalance Your Investment Portfolio? U.S. Securities and Exchange Commission.
Asset Allocation. Corporate Finance Institute.
Asset Allocation. U.S. Securities and Exchange Commission.
When to Sell Stocks. (April 2024). Investor’s Business Daily.
Research Before You Invest. U.S. Securities and Exchange Commission.
Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing. (August 2009). U.S. Securities and Exchange Commission.
Like-Kind Exchanges Under IRC Section 1031. (February 2008). Internal Revenue Service.
Comments