How Rebalancing helps keep your Portfolio on Track

How
rebalancing helps keep your portfolio on track

Markets
& Investing

Keeping
your financial plan aligned with your goals, risk tolerance and time horizon.

When you
start investing, your advisor builds a portfolio aligned with your personal investment
objectives. Your target allocation takes into consideration your goals, risk
tolerance and time horizon, among other things. Unless something in your life
changes, your portfolio should continue to align with your objectives. However,
this means revisiting your allocation and rebalancing when necessary to ensure
you have a healthy mix of performance and risk level that align with your
near-term and long-term goals for your wealth.

Out of
balance

First,
rebalancing is a regular part of maintaining a portfolio. The investments in
your portfolio each grow at different rates. Typically, best-performing asset
classes will grow at a faster rate, therefore taking up a larger proportion of
your portfolio over time. This alone can skew a portfolio to carry more risk
than you originally intended.

Sometimes,
market fluctuations can cause your portfolio to become imbalanced. When certain
style investments are in favor relative to others (whether they’re riskier or
not), your portfolio allocation may start to drift and require rebalancing to
restore the appropriate mix to achieve the diversification benefits initially
designed.

Rebalancing
methods

There are
several ways to rebalance your portfolio. Integrating factors such as personal
preferences, tax implications and costs associated with monitoring and trading
is the best way to determine which method fits with your investment style.

Buy and
hold is one way
to approach portfolio rebalancing. Once your assets are invested, you make no
changes and allow them to move freely with the markets. This means the assets
with the highest returns (most likely those with the highest risk) will take up
a higher percentage of your portfolio. This may mean the overall risk of your
portfolio increases over time and is more prone to momentum reversing at times
of market shifts.

Time-based
or constant mix calls
for asset class proportions to be brought back in line at regular intervals,
most commonly annually or semi-annually. Rebalancing more frequently, like
monthly or quarterly, may reduce the unwanted portfolio shifts but also lead to
more transaction costs, paying taxes on short-term capital gains and a
potential loss of returns if an asset class is not given sufficient time to
appreciate.

Drift-based
or contingent sets
a threshold, known as a tolerance band, around each of the asset classes in
your portfolio and rebalances whenever a threshold is breached. Bands can be
relative or absolute. For example, setting a 10% relative band around a 40%
allocation would trigger a rebalance at weights above 44% or below 36%, while a
10% absolute band would allow the allocation to drift up to 50% or down to 30%
before rebalancing.

Common
pitfalls

Following a
rebalancing process will keep your investment goals at the forefront and help
you avoid common behavioral investment tendencies. Three common behavioral
finance flaws include:

Herd
mentality: This is
when you follow what everyone else is doing, which means selling assets that
are underperforming and buying those outperforming. This is usually
counterproductive to achieve the optimal performance of the portfolio as the
price of assets might be distorted the most with crowded positionings.

Loss
Aversion: Investors
tend to fear losses more than they value gains. This can lead them to hold onto
losing investments for too long, hoping they will recover, rather than
rebalancing the portfolio to cut losses and reallocate funds more effectively.

Overconfidence: Investors can sometimes
overestimate their ability to predict market movements. This can result in
frequent and unnecessary adjustments to the portfolio, increasing transaction
costs and potentially reducing overall returns over the long term.

Mental
accounting: A
portfolio should be viewed as a whole, instead of compartmentalizing each
piece. This can cloud an investor’s judgement when it comes to making risk
reduction decisions and prioritizing the portfolio’s long-term performance.

To avoid
falling victim to common behavioral tendencies and help ensure your portfolio
is set up for long-term success, speak to your advisor about how and when to
rebalance and which method matches your investment style.

Kent Pendleton, AAMS®

Financial Advisor, RJFS

Pendle Hill Advisors LLC

14375 Liberty St, Ste 109 | Montgomery, TX 77356

T 936-297-8267

Kent.Pendleton@raymondjames.com | www.raymondjames.com/pendlehilladvisors

Securities offered through
Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment advisory
services are offered through Raymond James Financial Services Advisors, Inc.
Pendle Hill Advisors is not registered broker dealers and is independent of
Raymond James Financial Services.

Rebalancing
a non-retirement account could be a taxable event that may increase your tax
liability.

Investing
involves risk and you may incur a profit or loss regardless of strategy
selected, including diversification and asset allocation.

Any
information is not a complete summary or statement of all available data
necessary for making an investment decision and does not constitute a
recommendation.