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WalletPrep worksheet · Investing

How do you rebalance your portfolio?

Name ____________________ Date __________

Key ideas

  1. Rebalancing keeps your risk where you set it. When stocks outgrow bonds, you hold more risk than you chose. Rebalancing moves the mix back.
  2. Once a year is usually enough. The SEC notes that rebalancing tends to work best when done infrequently, such as every 6 or 12 months.
  3. Rebalance where trades aren't taxed. Selling inside a 401(k) or IRA triggers no tax. In a taxable account, steer new money instead of selling.

Vocabulary

Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Asset allocation
How you divide your investments among types like stocks, bonds and cash, based on your goals, timeline and comfort with risk.
Rebalancing
Moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target.
Dividend
A payment a company makes to its shareholders out of its profits, usually in cash and often every 3 months.
401(k)
A retirement savings plan offered through an employer. Money comes straight from your paycheck, often with an employer match.

Work it out

Sam chose 70% stocks and 30% bonds and invested $20,000 in his IRA: $14,000 and $6,000. A year later, stocks are worth $18,000 and bonds are still $6,000.

  1. Stocks now
  2. Bonds now
  3. Total portfolio
  4. Stock share now
  5. Stocks now
  6. Target stocks (70% of $24,000)
  7. Move from stocks to bonds

Check yourself

  1. Your target is 60% stocks. You hold $33,000 in stocks and $17,000 in bonds. How much should you move from stocks to bonds?

    • A. $1,000
    • B. $3,000
    • C. $5,000
    • D. $13,000

  2. Where can you sell to rebalance without owing tax?

    • A. A regular brokerage account
    • B. A joint brokerage account
    • C. An IRA or 401(k)
    • D. Any account, if you sell within 30 days

  3. Which way of rebalancing avoids selling anything?

    • A. Sending new contributions to the holding that is under target
    • B. Selling the holding that is over target
    • C. Moving everything to cash
    • D. Switching to a different brokerage

Your turn

List every investment account and its balance in stocks, bonds and cash. Add the totals and divide to find your current mix. If anything is more than 5 points off target, plan the trade in a retirement account, and set a yearly reminder.

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Answer key

How do you rebalance your portfolio?

Work it out

  1. Stocks now$18,000
  2. Bonds now$6,000
  3. Total portfolio= $24,000
  4. Stock share now75%
  5. Stocks now$18,000
  6. Target stocks (70% of $24,000)− $16,800
  7. Move from stocks to bonds= $1,200
  1. His stock share is $18,000 ÷ $24,000 = 75%, which is 5 points over his 70% target.
  2. His target for stocks is $24,000 × 70% = $16,800, so he sells $18,000 − $16,800 = $1,200 of the stock fund.
  3. He buys $1,200 of the bond fund, so bonds go to $6,000 + $1,200 = $7,200, which is $24,000 × 30%. It is an IRA, so the sale is not taxed.

Check yourself

  1. B. $3,000 The total is $33,000 + $17,000 = $50,000. The stock target is $50,000 × 60% = $30,000, so move $33,000 − $30,000 = $3,000.
  2. C. An IRA or 401(k) Trades inside tax-advantaged accounts like an IRA or 401(k) are not taxed. In a taxable account, selling at a gain creates a capital gain.
  3. A. Sending new contributions to the holding that is under target New money that buys only the underweight holding pulls the mix back toward target with no sale, so there is no capital gain.