Every well-constructed portfolio starts with an asset allocation that is personalized for you. Your asset allocation is the optimal mix of asset classes, like equities, fixed income and cash, for example, and is based on a variety of factors, including your goals, the time horizon to achieve those goals, tolerance for risk, age, and more. Your asset allocation maximizes your opportunity to achieve your long-term goals. It’s important to know, however, that determining your asset allocation is not simply a one-time process. Indeed, it is imperative that you review your asset allocation on a regular basis to ensure that it is still aligned with your investment goals and risk tolerance.

One other important element of achieving your portfolio goals is that you rebalance your asset allocation on a regular basis. Did you know that your portfolio’s risk level can change even if you didn’t change any of your investments? Over time, market fluctuations can change the value of your investments and, ultimately, your asset allocation weightings, so you are no longer tracking to your original plan. Indeed, your portfolio risk may inadvertently increase if your asset allocation is no longer aligned to your goals and risk tolerance.

The definition of green investments is still somewhat of a grey area, and it can vary depending on whom you ask. For example, some experts believe that a company can only qualify as a green investment if it’s directly involved in environmentally beneficial products or services, like renewable energies or compostable materials. Others would argue that any company that has eco-friendly policies and practices qualifies as a green investment. It’s up to each individual investor to determine what constitutes a green investment to them and to invest accordingly.

Therefore, it is important to rebalance your investment portfolios on a regular basis, which is the process of changing the weightings of the assets in your portfolios. It means that you buy and sell positions in your portfolio to get back to your original asset allocation. The main benefit of rebalancing is that it maintains your desired risk level over time. Rebalancing also allows you to implement any changes you make to your investing style or asset allocation, as is sometimes necessary over time.

To rebalance your portfolio, you can either invest additional funds in any asset class that is underweight or sell investments from an asset class that is overweight and then, invest those funds in an asset class that is underweight. A key consideration when selling investments in your portfolio, however, is tax implications, so ensure that you take tax implications into consideration when determining the optimal way to readjust your portfolio. One of the other disadvantages of selling one asset class to reinvest in another is that you are required to sell your highest performing assets. If you rebalance by contributing new funds, you can hopefully leave your winners to continue to outperform.

Of course, you are probably wondering how often, or when, you should rebalance. It is almost impossible to know how far prices will move over any given period, thus making it difficult to know precisely when to rebalance. There are a variety of strategies with respect to rebalancing as follows:

Rebalance At a Specific Time Interval

With this strategy, you determine, in advance, a specific time interval at which you will rebalance your portfolio. The most common interval is yearly, although some investors prefer to do it quarterly or less frequently, like every two years. If you are a long-term investor, semi-annually or yearly is usually frequent enough. Monthly or weekly rebalancing is not recommended as it can be overly expensive and unnecessary.

Threshold Basis

With this strategy, you rebalance whenever an asset class moves away, also referred to as drifts, from your optimal asset allocation by more than a predefined percentage. For example, if you set a 5% threshold for drift and have a target asset allocation of 65% in equities, you could set a rebalancing guideline if the equity weighting of your portfolio represents more than 70% or less than 60% of your portfolio. This is a more responsive approach that really focuses on the allowable percentage asset allocation of your portfolio. It is also sometimes referred to as the constant-mix rebalancing strategy.

Partial Rebalancing

With this strategy, you may choose to rebalance based on either a calendar or threshold basis. But, in this scenario, you only adjust part of the drift in asset allocation at each rebalancing. This tends to be a more tactical and active approach and is typically best suited for more sophisticated investors.

No matter how often you decide to rebalance, it’s important to stay focused on your long-term goals and to not make short-term changes in response to market volatility. Rebalancing too frequently takes time and effort, and can often result in lower returns, higher costs and heavier tax burdens. Our advice is to pick a rebalancing frequency that works for you, set a reminder in your calendar, and stick to it! By having a regular rebalancing schedule in place, you can not only keep your asset allocation on track but also keep the emotions out of investing.

Source Morningstar, “Sustainable Funds U.S. Landscape Report 2021: Another Year of Broken Records”