Does Portfolio Rebalancing Work? Yes, Even in Bear Markets (2024)

FAQs

Should I rebalance my portfolio during a bear market? ›

Does Portfolio Rebalancing Work? Yes, Even in Bear Markets. Consider adopting a portfolio rebalancing strategy, even during down markets. A bear market can sometimes throw your finely tuned asset-allocation mix out of whack.

Bottom line. Rebalancing your portfolio is a great way to be in tune with your finances. It ensures you remain diversified and on track to reach your long-term financial goals. Consider rebalancing your portfolio regularly or when your portfolio drifts too far from your desired allocations.

It states that rebalancing between assets should occur only if an asset or category has drifted from its original target by an absolute percentage of 5% or a relative of 25% whichever is less.

While you can choose to rebalance on any schedule, an annual basis lets you avoid most high transaction costs and reap the equity from the assets. Rebalancing too often can increase costs in capital gains taxes and trading fees.

Selling off all your stocks after seeing red in your portfolio during a bear market is the last thing you want to do. Volatility is scary, especially if you are risk averse, but running with the volatility wave is key and beneficial to the success of your long-term portfolio.

Selling assets to rebalance a portfolio can trigger a taxable event and have tax implications. When an asset is sold at a profit, capital gains tax is triggered, which can eat into the overall returns of the portfolio. Additionally, frequent rebalancing can lead to more taxable events, which can further erode returns.

This is a rule that aims to aid diversification in an investment portfolio. It states that one should not hold more than 5% of the total value of the portfolio in a single security.

Another way to avoid taxes is to place your portfolio in a tax-advantaged account, such as an individual retirement account (IRA). This way, you can avoid taxes while rebalancing the portfolio and are liable for taxes only when you start withdrawing from the account.

When to rebalance your portfolio. Set a threshold or limit for drift: Some investors rebalance after their asset mix begins to drift more than 1% in any direction. Common thresholds include 1%, 2% or 3%.

Monthly and quarterly assessments are typically preferred, because weekly rebalancing would be overly expensive and a yearly approach would allow for too much intermediate portfolio drift. The ideal frequency of rebalancing must be determined based on time constraints, transaction costs, and allowable drift.

Does rebalancing help returns? ›

Rebalancing will reduce the portfolio's volatility, but the cost of rebalancing will also reduce the portfolio's net returns.

Many investors find January to be a good month to establish disciplined annual rebalancing since they will know their portfolio is allocated as intended at the start of every New Year.

It reduces risk and ensures that your portfolio mix isn't out of balance. While some investors choose to rebalance manually, most choose automatic rebalancing for its simplicity and time-savings. Others choose this approach because it ensures the task won't be overlooked because of a memory lapse.

For example, you can rebalance annually when you receive your year-end 401(k) statement. How frequently you rebalance is not a critical factor since it will not significantly affect your account's risk and return—so make it easier on yourself and rebalance less frequently (but at least once a year).

Several investment options have proven track records in bear markets. Value stocks: Despite popular advice, value stocks tend to outperform growth stocks, even during an economic downturn. Dividend stocks: Dividend stocks tend to outperform non-dividend stocks, and may have less risk.

Diversification tamps down the volatility that tends to increase during bear markets and can subject investor portfolios to unnerving fluctuations. Bear market asset allocation generally involves dialing down the percentage of your portfolio invested in stocks and increasing exposure to government bonds or cash.

“Investors who remain even keeled and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.” Check in with a financial advisor.