Q: I'm doing some year-end financial checkups. How do I know if my stock portfolio needs rebalancing?
First off, rebalancing refers to strategically selling and/or buying investments in order to correct an imbalance in your asset allocation.
There are two reasons you might want to rebalance your portfolio.
The first is if any of your investments have done especially well (or poorly) and your portfolio is now a bit top-heavy. For example, I invested nearly 10% of my portfolio's value in Bank of America stock in 2016 and the shares more than doubled over the next couple years. At one point, nearly 25% of my portfolio was in Bank of America due to its strong performance.
This was certainly a good problem to have, but it was still a problem. I simply didn't feel comfortable with one-quarter of my assets in a single stock. So I sold about half of my position and distributed the money among some of my other stock investments to balance things out. If your portfolio is a bit too dependent on any one stock, it can be a good reason to do the same.
Second, you might want to rebalance if it's been a while since you last adjusted your asset allocation. Simply put, as you get older it's a good idea to gradually reduce your exposure to stocks and increase your exposure to fixed-income investments. I use the "110 rule," which says that if you subtract your age from 110, you can find your ideal stock allocation. If your portfolio is a little too stock-heavy, it could be a good idea to shift some of your funds into fixed-income assets.
