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The Importance of Monitoring and Rebalancing

Check your investments at least once a year

As the market changes, you may need to make changes in your investments. For example, when stocks rise or fall, the percentage of assets you have in stocks rises or falls accordingly, which could put your portfolio out of balance. Similarly, if there are changes in your own circumstances, you may choose to reallocate your assets.

To make sure you're still on target with your goals, check your portfolio at least once a year to look at the following:

  • Your asset allocation—Does it still match your tolerance for risk?
  • Your investment concentration—Do you have too much invested in a particular sector, industry, or company?
  • Your individual investments—Have ratings on your stocks or funds gone down?
  • Life changes—Have personal events or circumstances changed your feelings about risk?

How to monitor your investments using benchmarks.

To understand how your investment has performed, you must compare its results to an appropriate benchmark. It can be misleading to compare a fund that invests only in stocks to a fund that invests in both stocks and bonds, or a fund that invests in large-cap stocks to a fund that invests in small-cap stocks. It would be comparing apples to oranges, and the comparison wouldn't be meaningful.

For example, let's say your large-cap fund is up 8% for the year. You feel pretty good about this until you look at the fund's relevant benchmark, the S&P 500®, which returned 12% for the year. On the other hand, if your small-cap fund is up 12% and its relevant benchmark, the Russell 2000, is up 9%, you should be pleased.

The importance of rebalancing.

When you do your yearly portfolio checkup, you may find that you need to rebalance. Rebalancing your portfolio—buying or selling asset classes to restore your portfolio to your original target allocation—is an important step in controlling risk. It requires you to sell investments from the asset class that is performing well (and which now represents an increased percentage of your portfolio's overall value) and buy investments in the asset class that is currently out of favor. While it may seem counterintuitive, you're actually taking profits from winning asset classes that may have reached their peak and buying other asset classes that have performance potential. In effect, you're buying low and selling high.

To keep your portfolio in balance, it's a good idea to prune any asset class that's overgrown its target by 5%.

Rebalancing and asset allocation cannot ensure a profit, do not protect against losses, or guarantee that an investor's goal will be met.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner, or investment manager.

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