A: Rebalancing is a key part of maintaining a healthy investment portfolio that aligns with your goals, risk tolerance, and time horizon. Over time, different assets grow at different rates, which can shift your portfolio’s original allocation and increase your exposure to risk. Market fluctuations can also cause imbalances, making it necessary to periodically review and adjust your investments. There are several rebalancing strategies: a buy-and-hold approach lets assets grow without interference, which may increase risk over time; time-based rebalancing adjusts allocations at regular intervals – such as annually or semi-annually, drift-based rebalancing triggers adjustments when asset weights move beyond set thresholds. Each method has pros and cons, including tax implications and transaction costs, so it’s important to choose one that fits your investment style.
Avoiding behavioral pitfalls is just as important. Common mistakes include herd mentality: following market trends rather than your plan, loss aversion: holding onto losing investments too long, overconfidence: making frequent and unnecessary changes, and mental accounting: viewing investments in isolation rather than as part of a whole. These behaviors can undermine long-term performance. To stay on track, work with your advisor to determine the right rebalancing method and schedule for your needs.
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.