Why now is a good time to rebalance your portfolio

Rebalancing your portfolio is a healthy financial habit. But it could be particularly important this year, says John Stepek.

When it comes to New Year’s resolutions, setting goals is old-fashioned. These days, say the productivity gurus, it’s all about developing good habits. One healthy financial habit to acquire, if you haven’t already, is the practice of rebalancing your portfolio at least once a year. Rebalancing is a simple concept. When you invest for the long term, you should have a plan in mind as to where you are going to put your money. This is known as “asset allocation”. It doesn’t have to be complicated – we generally suggest a division between stocks, bonds, property, gold and cash. Your precise asset allocation will depend on your time horizon and risk appetite (which in turn should mostly depend on your time horizon).

Of course, as time goes by, the percentage split of your portfolio will diverge from your initial asset allocation. If your equity holdings rise faster than your bonds, say, then you’ll end up with a bigger chunk of your money in stocks than you had originally planned, which theoretically means your portfolio has become riskier. The point of rebalancing is to bring it back into line when it has diverged sufficiently from your original plan.

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John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.