What is portfolio rebalancing?

Rebalancing is the act of selling shares of a holding that has done particularly well, and using those funds to buy shares of a holding that has had a lower success to keep your overall investment class allocation on target. This allows you to maintain your desired portfolio for your risk tolerance and helps you stay on track towards your future financial goals.

If you were to set your initial allocation and did nothing else, over time your allocation would be very different from your intended target. Certain asset classes will perform better than others during some cycles and in general, stocks will perform better than bonds long-term.

However, this means a disproportionate amount of your portfolio will be invested in the most recent high performers, and less will be allocated to the low performers. While it may seem counterintuitive, the remedy is to invest into the lower performing asset classes allowing you to buy low and sell high over time.

If you’re an active participant in your 401(k) plan, you will typically be making regular deferrals into your 401(k) account and we will automatically invest these funds to keep your asset allocation on target. 

However, in major market dislocations or extended bull or bear markets where stocks appreciate or depreciate significantly, your asset allocation can deviate substantially from your target allocation. Any time your entire portfolio has a drift of 5% or more, Guideline will automatically rebalance your investments back to your target allocation. (1) This will ensure that your portfolio remains close to your target allocation over time and is aligned with your retirement goals.

 

(1) “Portfolio drift” is calculated as the sum of each investment’s absolute deviation from its targeted allocation, divided by two. For example, a portfolio has a target allocation of 50% Fund A, 30% Fund B, and 20% Fund C. The current allocation is 40% Fund A, 36% Fund B, and 24% Fund C. Portfolio drift will be (10+6+4)/2 = 10% and will trigger a rebalance according to Guideline’s rebalancing methodology.

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