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Rebalancing to Help Reduce Risk

What if there were a way to consistently buy low and sell high? As it happens, there is—if you take a disciplined approach to rebalancing your portfolio.

Because some of your holdings will invariably do better than others as the market rises and falls, your portfolio can drift away from its target asset allocation over time. If you commit to regularly selling assets that have become overweighted in your portfolio and buying those that have become underweighted, you’ll effectively be buying low and selling high.

Unfortunately, many people do the opposite. “When you have new money to invest or are making changes to your portfolio, the common urge is to put more money into the stocks or funds that have been doing the best recently,” says Mark Riepe, head of the Schwab Center for Financial Research. “Instituting a disciplined rebalancing strategy can help remove those emotions from the decision-making process.”

Practically speaking, you can approach rebalancing in a number of ways. Some people like to follow a strict schedule, realigning their portfolio to their target asset allocation monthly or quarterly. Others—including Mark—find it more useful to set a threshold past which it’s time to act.

“One approach would be to use a five-percentage-point departure in any one area of your target allocation as a prompt to rebalance,” he says. For example, if your target allocation calls for 60% stocks, you might choose to rebalance when that allocation rises to 65% or falls to 55%.

However you choose to approach rebalancing, the important thing is to have a reasonable rule—and to stick to it, regardless of what the market is doing.

What You Can Do Next

  • To see if your portfolio is in line with your target allocation, log in to the Portfolio Checkup tool.

  • When you invest with Schwab Intelligent Portfolios®, your portfolio is rebalanced automatically. Learn more.

Important Disclosures

Please read the Schwab Intelligent Portfolios Solutions™ disclosure brochures for important information, pricing, and disclosures related to the Schwab Intelligent Portfolios and Schwab Intelligent Portfolios Premium programs. Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are made available through Charles Schwab & Co. Inc. (“Schwab”), a dually registered investment advisor and broker dealer.

Schwab Intelligent Portfolios® and Schwab Intelligent Portfolios Premium™ are designed to monitor portfolios on a daily basis and will also automatically rebalance as needed to keep the portfolio consistent with the client’s selected risk profile. Trading may not take place daily.

Diversification and rebalancing a portfolio cannot ensure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a nonretirement account, taxable events may be created that may affect your tax liability.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.


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