19 Dec Should I rebalance my portfolio or let it ride?

Q. I know I’m supposed to rebalance my portfolio once or twice a year. My investments have gone up, so I’m stock-heavy, but I think the markets will keep going up so I’m just tempted to let it ride right now. But a little angel on my shoulder is telling me not to. What should I do?
— Investor

A. The end of the year is a time when many investors review their portfolios.

As you noted, allocations change over the year because of how the stock market performs, and you want to make sure the investments aren’t out of whack.

But let’s take a step back.

Your portfolio allocation should largely be decided on when you need the money and your risk tolerance, said Matt Rembish, a certified financial planner with OneDigital in Boonton.

Let’s look at when you may need the money.

For example, let’s say this money is in your 401(k), and you plan on using it for retirement living expenses.

“You can afford to be riskier with your portfolio — invest in more stocks — if you have 20 years until you retire, rather than five years,” Rembish said. “The reasoning for this is if there is major drop in the stock market, your portfolio has some time to recover before you need to draw down on your portfolio. The closer you are, the more you should protect what you’ve saved already.”

Then, your risk tolerance. This is how you feel about the market and the risks you are willing to take.

“I like to explain this as, `How much of a punch in the gut can you take?’” Rembish said. “It’s easy to be more stock heavy when the market is performing well, but what if it’s not?”

He said you should calculate what your overall stock/bond percentage is, then look at what your portfolio would have done in 2008. How would a return like that make you feel? Can you handle it? If not, maybe you should reevaluate your positions, he said.

Rebalancing is getting your portfolio back to your desired allocation after market movement during the year, Rembish said.

“Your portfolio allocation is decided on the two factors I discussed above – it doesn’t matter how the market is performing; your portfolio should align to your risk tolerance and financial goals,” he said.

If you are willing to be riskier to get a higher return, that is fine, he said, noting that when the market performs well for an extended period, it’s easy to become confident that the market will continue that path.

“Has anything happened that changed your risk tolerance or your goals? I’m sure there is also a fear of missing out on gains if the market does continue to do well,” he said. “I highly suggest looking at what your portfolio would do in a 2008 type market environment.”

Market corrections can happen quickly, Rembish said, and if you are not someone that can handle that sort of downturn, you will be even more upset at yourself for keeping that level of stock.

“Those types of situations are when investors truly know what their pain tolerance is,” he said. “I like planning for bad things to happen, even if I expect the market to do well. This way if the market does poorly, I know I can handle the punch in the gut and stay consistent with my portfolio.”

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This story was originally published in December 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.