How to Rebalance Your Portfolio

Leo

Welcome, everyone, to today's episode! I'm Leo, and I'm thrilled to have you with us as we dive into the fascinating world of portfolio rebalancing. Today, we're joined by Barbara A. Friedberg, an experienced investment portfolio manager. Barbara, it's great to have you on the show!

Barbara A. Friedberg

Thanks, Leo! I'm excited to be here and share insights on something that every investor should prioritize—rebalancing their portfolio.

Leo

Absolutely! So let's kick things off with the basics. Why is rebalancing so important? I mean, not many people think about it until they see their portfolio swinging wildly, right?

Barbara A. Friedberg

Exactly, Leo! Rebalancing helps minimize the volatility of your portfolio. When you start out with a defined asset allocation, over time, due to market fluctuations, you might find that your stock holdings have grown disproportionately compared to bonds, or vice versa. This deviation can expose you to more risk than you initially intended.

Leo

And that makes perfect sense. So, what are the strategies an investor can use to rebalance their portfolio effectively?

Barbara A. Friedberg

There are a few strategies, Leo. One common method is to set a specific percentage range for when rebalancing should occur. For instance, if an asset class deviates by 5% from your target allocation, that's your cue to make adjustments.

Leo

I see where you’re going! So, you basically have rules in place to ensure that your portfolio stays on track. Are there other approaches too?

Barbara A. Friedberg

Definitely! Another approach is time-based rebalancing, where you might choose to review your portfolio quarterly or annually. This can be a good way to avoid being too reactive to market movements and keeps the process structured.

Leo

That sounds like a solid plan. I think what’s interesting too is how technology has changed the game. We now have robo-advisors that can handle rebalancing automatically. What are your thoughts on that?

Barbara A. Friedberg

Robo-advisors are a game changer! They offer low-cost, automated portfolio management that can include rebalancing as a feature. They typically assess your risk tolerance and goals through a quick survey, then manage your portfolio accordingly.

Leo

That's such a great tool for new investors or those who might feel overwhelmed managing their own portfolios. But for those who prefer a hands-on approach, what would you suggest as best practices for manual rebalancing?

Barbara A. Friedberg

First off, keep a well-documented asset allocation plan. It's important to track your investments and know your target percentages. Regularly reviewing your portfolio, perhaps semi-annually, can help you stay on top of any necessary adjustments.

Leo

That’s great advice! So for listeners out there, keeping a long-term perspective is vital, right? It can be tempting to react to short-term fluctuations.

Barbara A. Friedberg

Absolutely, Leo! The market can be unpredictable, but staying true to your strategy and rebalancing as needed can help weather those storms and keep your investment goals intact.

Leo

Well said! Before we wrap up, are there any common pitfalls you see investors falling into when it comes to rebalancing?

Barbara A. Friedberg

One major pitfall is overreacting to market changes. Frequent buying and selling can lead to increased costs and potential tax implications. It's crucial to stick to your rebalancing schedule and not let emotions drive your decisions.

Leo

Such a valuable point! Well, thank you, Barbara, for sharing your insights on rebalancing. I’m sure our listeners now have a much clearer understanding of how to approach their portfolios!

Barbara A. Friedberg

Thank you for having me, Leo! It was a pleasure discussing this important aspect of investing.