| After a year of double-digit stock market returns, it may be time to rebalance your portfolio.
A portfolio rebalance means selling some stocks and buying some bonds, or vice versa, so that most of the time your portfolio's asset allocation matches your risk tolerance and desired level of returns. When rebalancing, primarily, you want to sell over-weighted assets.
So, why is portfolio rebalancing so important?
CNBC's Kate Dore spoke with some financial experts to get their input. A rebalance is needed if a portfolio becomes too heavy in stocks, for example, because it may expose someone to added risk during periods of volatility, with the possibility of bigger future losses. On the flip side, a portfolio overly weighted in bonds may make it harder to achieve the returns needed to reach long-term goals.
Investors must also consider a possible tax bite in a rebalance, particularly when selling appreciated assets from a taxable portfolio.
While assets held for more than a year qualify for lower long-term capital gains rates, investments owned for less time may incur regular taxes, known as short-term gains. If you are facing a short-term gain from selling a position, looking at when that gain becomes long-term is a good idea, one advisor explained.
Before completing a year-end portfolio rebalance, review your financial plan and risk tolerance and measure how much your portfolio allocations may have drifted since the last review. For example, a portfolio of 60% stocks and 40% bonds may have shifted to 70% stocks and 30% bonds based on market performance.
Advisors say you can either rebalance your portfolio at a specific time interval (say, yearly), or you can rebalance only when your portfolio becomes clearly unbalanced. There's no right or wrong method, but unless your portfolio's value is extremely volatile, rebalancing once or twice a year should be more than sufficient.
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