Portfolio Rebalancing Explained - What, When, Why, and How

Portfolio rebalancing refers to adjusting the allocations of different assets to maintain a desired risk profile. In this video I'll explain what rebalancing is and when, why, and how to do it.
// TIMESTAMPS:
00:00 - Intro
00:11 - What Is Portfolio Rebalancing?
01:04 - Why Is Rebalancing Important?
03:20 - How Often Should You Rebalance Your Portfolio?
04:29 - Rebalancing in a Taxable Account (Tax Consequences)
04:59 - How To Rebalance Your Portfolio
06:00 - Outro
// SUMMARY:
Portfolio rebalancing refers to bringing the assets in one's portfolio back to the target asset allocation, which is the specific ratio among assets for a desired risk profile. Specifically this means selling overweight assets and buying underweight assets.
Why is rebalancing important?
First, your target asset allocation has [hopefully] been set based on your personal goal(s), time horizon, and risk tolerance. If the portfolio strays from that target allocation, it no longer aligns with those things.
A misaligned portfolio is now either too aggressive or too conservative; either case is potentially problematic, especially for retirees. A disciplined investing approach is crucial for long-term success. By not rebalancing your portfolio, you are letting the markets determine its level of risk. Rebalancing is also a good time to double check your risk tolerance.
Secondly, while it may seem counterintuitive at first glance, rebalancing is quite literally buying low and selling high, as you are selling the asset that has risen and buying the asset that has fallen.
In that sense, rebalancing at regular intervals forces the investor to avoid their own behavioral biases.
Lastly, rebalancing maintains the portfolio's diversification over time. As allocations stray, the portfolio becomes more concentrated in one asset, which decreases diversification and increases risk.
Annual rebalancing is fine and the evidence says that anything more frequent is probably unnecessary.
Here are the steps to rebalance:
1. Login to your account once a year.
2. View the values of your assets and calculate how much you need to buy and sell of each.
3. Buy and sell as needed.
Some brokers may have a one-click “Rebalance” button, which is extremely convenient. M1 Finance has this, for example, in addition to the dynamic rebalance wherein new deposits are directed to underweight assets.
You may need to do this in multiple accounts, such as a 401k with your employer and your own Roth IRA.
If you're using a target date fund, it will do the rebalancing for you.
Read the blog post here: www.optimizedportfolio.com/re...
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Disclaimer: This is not financial advice, investing advice, or tax advice. The information presented is for informational, educational, and entertainment purposes only. Investment products discussed are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here: www.optimizedportfolio.com/te...
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[@OptimizedPortfolio]

When and how do you rebalance your portfolio?

[@jasonhobbs2405]

Quarterly for HFEA in my Roth. Yearly for everything else.

[@OptimizedPortfolio]

@@jasonhobbs2405 Thanks for sharing!

[@OptimizedPortfolio]

@@user-tm1kb3fq4m No

[@richardjohnson1261]

Very good content. You touched on some of the aspects of re-balancing that are not always explained by the "you just gotta do it" crowd. The idea of selling high performing assets in order to shore up under performing assets is counter-intuitive to some. However, likening the process to "sell high" "buy low" is very well done. Other points well made, too. Thanks for your insight. Cheers

[@OptimizedPortfolio]

Thanks, Richard!

[@erdrick22]

Great real world examples

[@OptimizedPortfolio]

Thanks!

[@GregK235]

Thanks for the informative presentation. I rebalance with new money to bring underweight positions up to desired allocation. As you mentioned, M1 Finance makes it easy with dynamic rebalancing, but I've found that the rebalance feature reset the total return calculation for the pie(s) involved.

[@OptimizedPortfolio]

Sounds good!

[@鱼眼儿看美股]

Very education, thank. I do quarterly rebalancing for my 401k account. I will need check if they charge transition fee :)

[@OptimizedPortfolio]

Thanks for sharing!

[@Dividend_Info]

I just rebalanced my portfolio too. Everyone must check his stocks from time to time and reevaluate his strategy

[@OptimizedPortfolio]

Awesome!

[@davidfolts5893]

Thanks for the excellent content; your voice should narrate a Super Bowl commercial.😀

[@OptimizedPortfolio]

Hah maybe one day!

[@Brent233]

Are there any benefits/ drawbacks to rebalance only when adding new money (not selling anything)? Any studies done on this topic?

[@OptimizedPortfolio]

Other than avoiding capital gains in taxable space, not really. There's some evidence of time series momentum within about a year; that's why I said more often than annually doesn't have a benefit.

[@Brent233]

Thanks, I do this in my Roth IRA with 90% large cap, 10% small cap value. Probably not as effective with bonds in mix.

[@OptimizedPortfolio]

Awesome!

[@OptimizedPortfolio]

I should have added a tad bit more context to my previous comment. Annual rebalancing strikes the balance of capturing any potential Momentum benefit while not letting allocations stray too far for too long. In other words, shorter than a year may intrude on Momentum, and longer than a year or 2 may detrimentally shift the portfolio's risk profile too much. So something around annually is a good choice IMHO.

[@Brent233]

Thanks

[@kimr.9906]

What if you have a multi asset 100% allocation? Do you still rebalance?

[@OptimizedPortfolio]

Not sure what you mean by "multi asset 100% allocation."

[@sudharshanrao4241]

@@OptimizedPortfolio 0% stocks and 100% bonds vise versa

[@OptimizedPortfolio]

@@sudharshanrao4241 That's a single asset portfolio.

[@coinbowl]

I heard target date funds rebalance automatically

[@OptimizedPortfolio]

Correct

[@EfLuis]

I just use M1 and let the percentages do its thing

[@OptimizedPortfolio]

Effortless!

[@EfLuis]

@@OptimizedPortfolio quick question if you don’t mind, I just started my Boglehead journey. No more individual stocks for me and last week I just added VXUS. But at age 29 do you think I should add bonds like BND? At least 5-10%?

[@OptimizedPortfolio]

@@EfLuis Depends on risk tolerance. I'm a fan of everyone owning at least some bonds for the simple reason that most don't have the stomach for 100% stocks, though admittedly 5-10% is doing basically nothing.

[@foodguy3435]

Less is more!

[@OptimizedPortfolio]

Indeed

[@TJ-Stackin]

Dave Ramsey recommends rebalancing only 2 to 4 times in a person's lifetime of investing! Interesting

[@OptimizedPortfolio]

Thanks for sharing, TJ!

[@radfaraf]

He seems more like an entertainer than a financial expert.

[@TJ-Stackin]

@@radfaraf maybe he is an absolute genius entrepreneur. His business revenue was over 300 million last year.

[@greg5892]

Dave Ramsey is an absolute dipshit! Interesting

[@napalm8030]

He has good advice on debt and saving. But his investment and retirement planning advice is atrociously awful. And he is ridiculously stubborn about it too. I don’t really care all that much, but his recommendation of an 8% spending rule for retirement is straight up dangerous.