Rebalancing | Vanguard

Rebalancing | Vanguard

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At a glance

  • Check your portfolio at least once a year. If your current asset mix differs from your target by 5 percentage points or more, rebalance.
  • Rebalancing ensures that your portfolio will expose you to the right amount of risk so you can meet your long-term goals.
  • If you want to sidestep the hassle of rebalancing, consider an all-in-one fund that does it for you.

Maintaining perspective and long-term discipline are important aspects of Vanguard’s principles for investing success. It’s easy to “set it and forget it,” trusting in your commitment to a long-term investment plan. However, it’s worth taking the time to check on your progress every now and then.

After you open an account and choose your investments, keep an eye on your portfolio. About once a year, compare your current asset mix to your target. If it differs by 5 percentage points or more, rebalance to get back on track.

Read on for tips about rebalancing your portfolio.


Your target asset mix vs. your current mix

Target asset mix

Your investment goal, time frame, and risk tolerance determine your target asset mix, which is the ideal mix of stocks, bonds, and cash you should hold in your portfolio. Once you determine your target asset mix, you can open an account and select investments.

Your target asset mix is all about what’s going on in your investing life—what you want to accomplish and what makes you feel comfortable. Market movements and current economic conditions don’t affect your target asset mix.

Most investors’ target asset mixes remain generally consistent, but it’s important to reevaluate your target if you experience a significant change in lifestyle—like having a child, changing jobs, or retiring.

Current asset mix

Your current asset mix is the actual mix of stocks, bonds, and other investments you hold in your portfolio at any point in time. Unlike your target asset mix, market movements and current economic conditions can affect your current asset mix. Although it may initially look identical to your target asset mix, your current asset mix can drift from your target over time as stocks and bonds fluctuate in value.

The case for rebalancing

When one asset class—stocks, for example—is performing better than another, your portfolio may become “overweight” in that asset class. Say your target asset mix is a 50/50 split between stocks and bonds. You originally invest $3,000 in a stock fund, which buys 20 shares. You invest another $3,000 in a bond fund, which also buys 20 shares. Your $6,000 portfolio balance is split evenly between stocks and bonds, matching your target.

Fast-forward several months in which stocks have consistently outperformed bonds. For simplicity, let’s say you don’t reinvest your dividends or capital gains or make any additional contributions, so you still own 20 shares of each fund. As a result of market fluctuations alone, your 20 stock fund shares are now valued at $5,000, and your 20 bond fund shares are worth $2,000. Your total portfolio balance—$7,000—is now split approximately 70/30 between stocks and bonds, making your portfolio overweight in stocks.

This scenario may be profitable right now—after all, you have more money invested in the higher-performing asset class. So what’s the danger? What goes up can come down. If you lose parity with your target asset mix by remaining more heavily invested in stocks and they go down in value, you have more to lose than you anticipated.

How to rebalance

If your current asset mix strays from your target by 5 percentage points or more, you may expose yourself to a level of risk (either too much or too little) that doesn’t align with your long-term goals. Rebalancing your portfolio realigns your current asset mix with your target mix.

Before you decide how to rebalance, think about timing. Do you want to return to your target asset mix immediately or are you comfortable doing so incrementally?

 Return to your target ASAP

In the example above, you have too much in stocks and not enough in bonds. To correct the balance, you can direct more money into bonds by making a purchase into your bond fund from a linked bank account (or by check). You can also exchange money from your stock fund into your bond fund. Both of these options can immediately realign your current asset mix with your target.

Return to your target over time

Using the same example, you can restore balance in your portfolio by directing investment distributions (dividends and capital gains) from your stock fund into your bond fund. Because you can’t predict the exact amount of future fund distributions, this option may require patience and regular monitoring.

If you invest in a taxable (i.e., nonretirement) account and sell investments that have gained value, you’ll most likely owe taxes. To avoid this situation, you could create a target asset mix that incorporates all of the accounts in your portfolio. Then you can compare your overall asset mix to your target rather than looking at each account individually. If you rebalance only within tax-advantaged (i.e., retirement) accounts, you won’t owe taxes if you sell investments that have increased in value. Note: We recommend that you consult a tax or financial advisor about your individual situation.


No interest in rebalancing? No problem.

If you don’t want to worry about rebalancing your portfolio, you can invest in a single all-in-one mutual fund that automatically rebalances its holdings. This type of fund invests in thousands of individual stocks and bonds so you can have a well-diversified portfolio by owning a single investment.

If you’re saving for retirement, consider a Vanguard Target Retirement Fund. Each fund is designed to help manage risk while trying to grow your retirement savings. The fund managers gradually shift each fund’s asset allocation to fewer stocks and more bonds so the fund becomes more conservative the closer you get to retirement. The managers then maintain the current target mix, saving you the hassle of ongoing rebalancing.

If you’re saving for a goal other than retirement, we offer 4 Vanguard LifeStrategy® Funds. Each fund is designed to match a common target asset mix so you can easily manage risk while trying to grow your savings. The funds are professionally managed to maintain their specific asset allocation, which means you don’t have to remember to rebalance.

Hello, long-term investor!

Welcome to Vanguard’s community of long-term investors. Keep up the good work! And remember, you don’t have to do it all yourself. We’ve got your back. We offer online tools and resources to help you monitor your performance and asset mix, as well as advice services if you’re looking for more comprehensive assistance.


More information:
Online calculators and tools
Vanguard Personal Advisor Services®


Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investments in target-date funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in target-date funds is not guaranteed at any time, including on or after the target date.

Each LifeStrategy Fund invests in 4 broadly diversified Vanguard funds and is subject to the risks associated with those underlying funds.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

The services provided to clients who elect to receive ongoing advice will vary based upon the amount of assets in a portfolio. Please review the Vanguard Personal Advisor Services Brochure (Form CRS) for important details about the service, including its asset-based service levels and fee breakpoints.



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