When and Why to Rebalance Your Investment Portfolio

Re-balance is a common investment phrase, but one with many meanings, many interpretations. The real questions are:

• What is 're-balance' in relationship to safe investing?
• What is 're-balance' in relationship to profitable investing?
• When should you re-balance
• What are the advantages of re-balancing
• What are the disadvantages of re-balancing

Re-balance, in its simplest explanation is selling your stocks, mutual funds or ETFs and buying new positions as if you were starting all over in the stock market.

Safe Investing and Re-balancing:

Re-balance in relationship to safe investing means that you are going to sell all or most of your positions at a specific point in time and pick new investments that offer less risk than your present holdings.

Profitable Investing and Re-balancing:

Re-balance in relationship to profitable investing means you are going to sell all or most of your positions at a specific point in time and pick new investments that offer more potential for profits, for greater gains than your present positions.

When to re-balance:

When you should re-balance your portfolio depends upon your investment philosophy. Some investment advisors advocate quarterly re-balancing while others suggest it is only necessary to re-balance once a year. An investment program may offer you the opportunity to set up automatic re-balancing at pre-determined times like quarterly, half-year and yearly, perhaps even monthly.

Advantages of Re-balancing:

The advantages of re-balancing include:

• Poor performing positions are eliminated
• Positions with greater potential, either for minimal risk or greater profit are purchased
• You can balance out the value of your positions equally so your diversification level remains constant and equal

Disadvantages of Re-balancing:

The disadvantages of re-balancing include:

• You could sell a highly profitable position that is still growing
• Your trading expense may grow needlessly
• Automatic re-balancing at specific times may turn out to be the wrong time to sell

So Re-balance or Not - that is still the question.

My suggestion considers two critical factors.

1. If you are using an investment tool, an investment software program, for safe investing that gives you buy-sell recommendations based on performance or relative strength of your positions and potential positions, then re-balance should not be necessary or rarely necessary.
2. It is not a bad idea to take a look at your portfolio, your individual strategies and positions one a year, perhaps once every six months to see if your chosen strategies are doing better or worse than your 'watch' strategies. In other words perhaps your 're-balance' should be to switch strategies and positions.

The objective in safe investing, particularly if you are using investing software, is to achieve gains with minimal risk, minimal loss, so re-balancing your portfolio can be good but automatic re-balancing should be considered very carefully.

Author Raymond Dominick is the designer of Dynamic Investor Pro investment software for stocks, ETFs and mutual funds. He is the author of the book, "Invest Safely and Profitably." He began investing in the markets in his teenage years. An experienced business manager and journalist, he has been a registered investment advisor representative, also a professional photographer who loves escaping to the wonders of Glacier National Park in Montana.