When Should You Rebalance Your Investment Portfolio?

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Rebalancing your investment portfolio is important. However, there may be times when you may not want to. For example, if rebalancing your portfolio could trigger a short-term or long-term capital gain for which you may not have the liquidity to pay, you may not want to rebalance.

You must gauge the long-term benefit of rebalancing versus the short-term consequence of rebalancing.

This begs the question what type of accounts are your securities located in? Are your investments in tax deferred or taxable accounts? Are the assets held in trust or in a foundation? Are there legal or fiduciary concerns?

Exceptions to rebalancing your investment portfolio depend on market circumstances, how you read risk and your long-term versus your short-term goals.

What does the liquidity of the securities you hold in your portfolio look like? Are they easily traded and is there good volume to support selling or buying more? Are the markets highly volatile this quarter?

How do you read risk? Would rebalancing have been the right thing to do in 2008 and 2009? During the government shutdowns? When the recent tariffs on certain imports were announced? When a stock is taken out of or put in an index?

Many alternative investments do not always offer a liquid market. You can suffer a substantial loss for liquidating these investments. Some investments like annuities and limited partnerships require a lock up period.

Did you inherit securities from your family? I once knew a harpist who was given stock in Hershey by her family. The return on the stock did not matter to her. She was never going to sell. She was to attached to the stock. But, she knew the potential consequences of holding forever.

You have to decide in advance what your triggers for making changes in your investment portfolio are? Is it price, volatility or a need for income or cash. Is it long-term consistent returns or are things happening short-term which could derail your plans?

Are you invested in mutual fund and exchange traded funds? What type of funds are they? Do the funds rebalance? What do they rebalance based on? Some are based on time like Target Maturity Funds. Others are based on investment style like value, growth or income. Are the funds holding true to their investment objective?

You may also be engaged in socially conscious or impact investing where returns are not your only motivation.

You answers to these questions will determine when and if you should rebalance.

Rebalancing should be done no more than once a quarter and only when the securities held in your investment portfolio are no longer in line with your goals and objectives. Rebalancing more frequently is counterproductive.