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What to know before rebalancing your investment portfolio

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After a volatile year for the stock and bond markets, it may be time to rebalance your portfolio by shifting assets back to match your original goals, according to experts.  

As of Nov. 28, the S&P 500 Index was down roughly 17% year-to-date, and the U.S. bond market has dropped by around 13%, leaving many investors with significantly different allocations than one year ago.

Typically, you choose an initial percentage of stocks, bonds and other assets based on risk tolerance and goals, said certified financial planner Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan. 

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But as the markets fluctuate, the allocation of each type of asset may shift, and without periodic rebalancing, “the portfolio starts to look very different,” he said.

For example, if your target is 50% stocks and 50% bonds, those percentages could eventually drift to 70% stocks and 30% bonds, which is “far riskier” than the original allocation, Watson said.

How to know when to rebalance your portfolio

The big piece that can come with rebalancing your portfolio is tax-loss harvesting.

Ashton Lawrence

partner at Goldfinch Wealth Management

You can rebalance with new contributions, including reinvested dividends, or by trading one asset for another. Watson generally considers aggregate investments across all accounts and makes the necessary changes in tax-deferred or tax-free retirement accounts. 

However, rebalancing in taxable brokerage accounts may provide other opportunities, particularly in a down market, experts say.

“The big piece that can come with rebalancing your portfolio is tax-loss harvesting,” which allows you to offset profits with losses, said Ashton Lawrence, a CFP and partner at Goldfinch Wealth Management in Greenville, South Carolina.

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While the average investor may save tax-loss harvesting for year-end, there have been “several opportunities” throughout 2022 amid the stock market volatility, he said. 

Reconsider your risk tolerance

Regardless of your portfolio changes, Lawrence said it’s important to consider the current economic conditions, including what’s expected to come. 

“You should always double-check your risk tolerance,” he said, explaining that investors are typically more willing to accept risk in a bull market and tend to become “extremely risk-adverse” in a bear market.


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