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Two Rebalancing Strategies

Over time, the ups and downs of financial markets can change the profile of your investment plan, leaving you with more risk than you would like, or less growth potential than you need.  Both of which can be detrimental to your long-term financial plan.

When we return, I will share with you two methods for rebalancing your portfolio and which of these we utilize at Austin Asset.

Welcome back.  There are two main methods used to rebalance portfolios: periodic rebalancing and tolerance band rebalancing.

And, just like an investment philosophy, regardless of the method you choose, the real benefit is realized when you commit to doing it.

First, let’s discuss periodic rebalancing and its relatively simple nature.  You pick an arbitrary period of time, say quarterly, or annually, and this is when you look at your investments and determine what needs to be bought and what needs to be sold to get back to the target weight.  One note: in times of large market movements your portfolio can move significantly away from its target allocation.  In doing so, you can be exposed to potentially more risk or less growth potential between rebalance periods.  Not ideal.

The other approach is tolerance band rebalancing and it is a bit more intensive than periodic rebalancing.  It requires a formulaic approach that demands frequent monitoring.  Instead of choosing a set time to rebalance, you do so when your asset allocation changes by a specific percentage or threshold of change.  This allows your portfolio to be consistently exposed to the asset classes you are targeting in the amount your plan calls for. (This is what Austin Asset does).

In conclusion, regularly rebalancing your portfolio can help you focus on the big picture and keep your goals and risk tolerance in line with your plan.  If it has been a while since you have rebalanced your portfolio, give us a call.  We would love to provide a second opinion.

For Austin Asset, this is Clayton Boone.  Stay safe and stay connected.

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