Should I Rebalance My Accounts?
With the stock market down over 30%, should I rebalance my accounts? This was a question I received recently. We’ll explain what rebalancing is and why it’s a good idea. (Read more below)
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Should I Rebalance My Accounts?
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David sent me an email, and he asked, “With the stock market down over 30%, should I rebalance my account?” This is a great topic and a central part of many investment strategies.
What Is Rebalancing?
First, let’s talk about what “rebalancing” is. Many people believe you should diversify your account. You put a portion in stocks, some in bonds, and some in cash. This is your asset allocation.
As things happen in the world around us, that mix changes. Stocks will typically grow at a faster pace than bonds, even though it doesn’t seem like that right now. If you don’t make changes from time-to-time, you will find you have a bigger percentage of your mix in stocks.
Rebalancing is a non-emotional choice—and that’s important—to sell investments that have done well. Then you buy other types of investments. It is rooted in one of the most basic investing concepts: buy low, sell high.
In Case You Missed it.
Last week we shared the 3 Things to Know About Bear Markets. Click on the button to watch.
You can rebalance to reduce risk
Most people talk about rebalancing as something to do after good times. It’s a way to reduce the risk in your account. If the percentage invested in stocks gets too high, the risk from a bear market increases. Rebalancing sells those stock positions—at higher prices—and puts the proceeds in things with less risk.
Rebalance after big drops, too!
But it also works on the other side. Now that stock prices have dropped over 30%, your allocation has also changed. You have less invested in stocks than you did before this all happened. So if you rebalance now, you’re doing what? Selling other investments to buy stocks at lower prices.
Talk to a CFP® Pro
Bear markets are tough on all of us. You can talk to a Certified Financial Planner to discuss your situation.
The decision to rebalance is about math
This is a “non-emotional choice.” It should have nothing to do with what is going on in the world around us. The decision is based strictly on the numbers.
Here’s what I mean. Your target mix is to have 50% in stocks and 50% in bonds. But after a few good years, the stock part is now 57%, and bonds are 43%. You sell the 7% and put it in bonds, to rebalance the account.
The same thing applies now, except maybe it’s the other way around. You have 57% in bonds. So you move that 7% back to stocks because the numbers say so. And when the stock market recovers, you’ll have more working for you.
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Should you rebalance your accounts?
In general terms, it is a really good idea. And if the market falls even further. Do it again. Doing so could help your accounts potentially recover faster.
(Please note, any investment decisions need to consider all relevant factors in your life. Any rates of return shown are for illustrative purposes only. They do not represent an actual investment. This also is not a prediction of future events. If you aren’t sure, please consult a financial planner you know and trust)
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About the Author
Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors This is now the 5th bear market he has experienced. Unfortunately, it probably won’t be his last.