Morningstar Solutions
Morningstar Solutions
Tips on Rebalancing Your Portfolio
Slide 2: Portfolio Rebalancing
From late 2007 to 2009, your portfolio likely took a hit more severe than you had ever expected. During this downturn, your holdings were probably a shadow of their former selves, and for this reason you might have been hesitant to make any adjustments or additions to your portfolio because you feared losing more money. When such situations occur, it's only natural to question the investments you own.
Slide 3: Portfolio Rebalancing
Rebalancing your portfolio, however, requires you to take a second look at your investments and bring your portfolio's allocations back in line with your targets. Even though this can be difficult from a psychological standpoint, employing a rebalancing program is one of the best ways to improve your portfolio's return, lower its risk level, and keep it on track to meet your current and feature needs.
Slide 4: Portfolio Rebalancing
Ideally, you should rebalance your portfolio when your stakes in stocks, bonds, or cash are 5 to 10 percentage points off of your target range. When rebalancing, you can also address any dramatic investment-style shifts that have occurred in your portfolio due to market fluctuations, such as if growth stocks or funds grew more dramatically than value-oriented securities. By making adjustments only when your targets are sufficiently out of range, you won't over-tinker (and incur needless tax and transaction costs), but you will be in effect trimming your winners (selling high) and adding to your underperformers (buying low), which automatically injects a valuation awareness into your strategy.
Slide 5: Portfolio Rebalancing
To begin rebalancing your portfolio, you first want to look at your asset allocation. A great way to do this is by using Morningstar's Instant X-Ray tool, which will allow you to see how diversified (or not) your assets are. To use this tool, all you have to do is enter the tickers for each holding you have in stocks or funds and the corresponding holding value.
Slide 6: Portfolio Rebalancing
Once you've done this, you want to compare your current asset allocation with your portfolio targets. (For tips on determining an appropriate asset allocation, click here.) If you are 5 to 10 percentage points off your target range, you should consider rebalancing; the exact percentage point difference that you use to trigger rebalancing should be sensitive to your investment horizon. For example, if you are a long-term investor with a little wiggle room, you may choose to allow for a 10% disparity before rebalancing, while short-term investors who are more hands-on or retired may want to rebalance when their allocation to an asset is 5% above the range.
Slide 7: Portfolio Rebalancing

It is also beneficial to examine the sector breakdown of your equity investments. The Instant X-Ray and Portfolio Manager tools can help you here; the more diversified your investment styles are, the more likely your stock portfolio will offer you a steadier ride through a variety of market conditions. A good basis of comparison for your portfolio is the S&P 500, which is widely used as a proxy for the performance of the U.S. stock market. Your portfolio distribution does not have to be identical to the index's, but you should watch for any positions that deviate from the norm.

Slide 8: Portfolio Rebalancing

If you are investing within a taxable account, you will want to be careful, because if you sell holdings from which you made a profit, you will likely face a tax consequence. However, there are several ways to position your portfolio for tax efficiency, and some tactics, such as tax-loss harvesting, can help you minimize the expense. Please see the articles below for further insight on taxable accounts.

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Tips on Rebalancing Your Portfolio
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