Why is Rebalancing Necessary?
To make sure you keep your asset allocation mix on track.
Over time, some of your investments may grow more quickly or decline less than others, which can cause your allocation percentages to shift. As a result, you might end up taking on more risk than you intended or not pursuing your goals as aggressively as you would have liked. This is when your portfolio may need to be rebalanced – adjusting your investments to reflect your original allocation or modifying your asset mix to reflect changes in your goals, personal situation or risk tolerance level.
In the two pie charts below, you can see how a diversified 80% stock / 20% bond portfolio might have shifted over the past five years, taking on a different risk/return profile.
Original Allocation
December 31,2015
Allocation 5 Year Later
December 31,2020
1. Source: © 2021 Ara Wealth Creator. Large-cap growth stocks are represented by the S&P 500 Growth Index; Small-cap Growth stocks are represented by Russell 2000 Growth Index; Small-cap value stocks are represented by Russell 2000 the Russell 2000 value index; foreign stocks are represented by the MSCI EAFE Index; and bonds are represented by the Bloomberg Barclays U.S. Aggregate Index. Indexes are unmanaged, and one cannot invest directly in an index. For illustrtive purposes only. Important data provider notices and terms available at www.franklintempletondatasources.com.
Keep in mind, asset allocation does not guarantee a profit or protect against a loss. All investments involve risks, including possible loss of principal.
