Portfolio Rebalancing Strategy

As markets go up and down over time, your asset allocation will deviate from the strategic plan we initially set in place. A portfolio rebalancing strategy brings your portfolio back in line with your strategic asset allocation.

A portfolio rebalancing strategy is important for managing risk, but it requires trading, and there are costs to trading. Our approach to rebalancing strikes a balance between managing the risk of a large deviation from your strategic asset allocation target and minimizing trading costs.

We set tolerance bands for each asset class.
We use a robust trading system to monitor compliance with tolerance bands on a daily basis.
To minimize costs and tax events, we will remedy strategic investment allocations that move outside the tolerance band without fully resetting the total portfolio.
When possible, we use portfolio cash flows to rebalance the portfolio back into alignment with your strategic asset allocation.

Beyond this strategic approach to portfolio rebalancing over time, we may also tactically rebalance your portfolio in periods of meaningful market dislocations. For example, when stock markets dropped meaningfully at the onset of the COVID-19 pandemic, we opportunistically increased stock allocations for our clients to take advantage of falling prices that we thought to be exaggerated.

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Frequently Asked Questions

What is portfolio rebalancing?

Portfolio rebalancing is a process of making trades in a portfolio to periodically bring the overall asset allocation back in line with the strategic levels that are consistent with an investor’s long-term financial goals. It requires selling assets that are over-weight and buying assets that are under-weight the target position size. When done correctly, portfolio rebalancing weighs the costs related to trading (fees and tax implications) with the benefits of bringing the portfolio back in line with the original allocation.

What is tactical rebalancing?

While strategic portfolio rebalancing responds to past market movements, tactical rebalancing is more forward looking. It is the process of temporarily adjusting an overall asset allocation based on significant market or economic events that are expected to create meaningful future portfolio risks or opportunities. As an example, during the dramatic stock market decline in early 2020 as the COVID-19 pandemic unfolded, Heritage Financial tactically rebalanced our clients’ portfolios out of bonds and into stocks, which were much more attractively valued. As stock prices recovered, we strategically rebalanced portfolios back to their long-term allocations, locking in the gains from our tactical rebalances.

What’s the best way to minimize taxes related to investing?

Taxes are a part of investing. But there are ways to reduce taxes so that you can keep more of what you earn. Asset location, a thoughtful approach to strategic portfolio rebalancing, periodic tax-loss harvesting, gifting of appreciated assets instead of cash, and managing taxable income through traditional individual retirement account (IRA) to Roth conversions are all wealth management strategies that Heritage Financial uses as appropriate to help to minimize taxes where possible.

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Heritage Clients , Massachusetts

The team at Heritage Financial Services helped us reach our goal of retiring without worry. We have placed our financial health and trust in their professional hands for the last 20 plus years. We can’t say enough about their attention to detail and assistance in helping us to understand market drivers and trends. They also helped us to understand how to eventually retire and spend the portfolio that we worked so hard to create over the years. I would highly recommend Heritage to anyone that wants to feel a sense of great trust in their financial advisor…and I have!!