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Educational Investing

Educational Investing

January 10, 2024

The Art of Rebalancing

Everyone loves a winner. If an investment is successful, most people naturally want to stick with it. But is this the best approach?

It may sound counterintuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio’s intent – and its risk profile. It’s a phenomenon sometimes referred to as “risk creep,” and it happens when a portfolio’s risk profile shifts over time.

Rebalancing is the process of restoring a portfolio to its original risk profile.

A portfolio can be rebalanced in two ways.

The first is to use new money. When adding money to a portfolio, allocate these new funds to assets or asset classes that have fallen. But remember that diversification is an investment principle designed to manage risk, but it does not guarantee protection from losses.

The second way to rebalance is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high.

Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine whether adjustments are appropriate.

Curious about your portfolio’s specifics? Schedule a meeting on our website to set up a time to get together.

Diversification Vs. Asset Allocation: What’s The Difference?

I’m sure you’ve heard the terms “asset allocation” and “diversification” used in the same sentence, but they are very different concepts that every investor should understand.

Asset allocation refers to dividing money among different asset classes, such as stocks, bonds, and cash alternatives. These asset classes have different risk profiles and potential returns.

The idea behind asset allocation is to offset any losses from one class with gains in another, thereby reducing overall risk in the portfolio (remember that asset allocation is an approach to help manage investment risk, but it does not guarantee protection from investment losses).1

On the other hand, diversification entails how your money is placed within an asset class. For example, let’s say a hypothetical stock portfolio included a computer company, a software developer, and an Internet service provider. Although the portfolio holds three companies, it may not be considered well-diversified because all the firms are connected to the technology industry. However, a hypothetical portfolio that includes a computer company, a drug manufacturer, and an oil service firm may be viewed as more diversified.

(Again, much like asset allocation, diversification is an investment principle designed to manage risk, but it does not guarantee protection from losses.)

To some, the differences between asset allocation and diversification are subtle, but they are critical concepts to understand when building an investment portfolio. Feel free to reach out to me if you have any questions—that’s what I’m here for.


The Connection Between Bonds And Interest Rates.

You may occasionally hear “talking heads” on the news discuss the bond market, but too often, these news reports use confusing language and obscure terms. Many important drivers affect the bond market, and one key concept that every investor should understand is the relationship between bond prices and interest rates.

Typically, when interest rates go up, bond prices go down. Likewise, when interest rates go down, bond prices go up. Recently, interest rates have increased rapidly in an attempt by the Federal Reserve to curb high inflation rates. The Fed's decision has put pressure on existing bonds.1 What’s next for bonds? That’s anybody’s guess, but for bondholders, interest rate risk always exists, as the potential for investment losses due to a change in interest rates. If you ever want a refresher on the relationship between bond prices and interest rates, please don’t hesitate to call. I’d be happy to help.

  1. org, November 2023

Disclosure: If an investor sells a bond before maturity, it may be worth more or less than the initial purchase price. By holding a bond to maturity investors will receive the interest payments due, plus their original principal, barring default by the issuer

This article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax, legal, and accounting professionals before modifying your investment strategy. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.