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Monitoring your risk level and rebalancing

It is important to revisit your investment mix against your risk profile and rebalance where needed. At My Fortress, we discuss this with our clients each year at their annual review.

Points to know

  • The risk level of your portfolio can change over time.

  • If it gets too far off your original plan, you'll need to bring it back into balance.

  • Your target asset mix may also need to change over time.

Don't lose your balance

It might seem surprising that your portfolio's risk level could change even if you didn't change any of your investments. But when one asset class is doing better than the others, your portfolio could become "overweighted" in that asset class.

For example, imagine you selected an asset allocation of 50% stocks and 50% bonds. If 4 years go by during which stocks return an average of 8% a year and bonds 2%, you'll find that your new asset mix is more like 56% stocks and 44% bonds.

Check your portfolio at least once a year, and if your mix is off by at least 5 percentage points, consider rebalancing. There are a couple ways you can do this.

Buy more of one kind of asset

In the example above, you have too much in stocks and not enough in bonds. So you could direct additional money to your bond investments to bring your portfolio back in balance. (The money could come from new investments or from distributions.)

Move money from one type of asset to another

You could also move some money from your stock portfolio into your bond portfolio. This will immediately realign you with your target.

It is important to note that this option may incur capital gains tax so needs to be managed carefully.

The danger of not rebalancing

It can be hard to convince yourself to rebalance. Selling "winning" shares probably goes against your instincts. But it reflects one of the simplest distillations of investing wisdom: "Buy low, sell high." If you don't rebalance, you'll wind up with an asset mix that doesn't match your risk tolerance.

Having a larger-than-planned allocation to stocks may seem harmless when stock prices are up. But no market really lasts forever, and when the tide turns, you'll be overexposed to the drop.


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