Rebalancing a portfolio involves adjusting the allocation of assets to bring it back in line with your investment strategy, ensuring it remains consistent with your risk and return profile. Why is this important? Over time, some assets may grow faster than others, shifting the balance. Rebalancing prevents any single investment or asset class from becoming too dominant, helping to manage and control risk. No matter how promising a particular security, industry or asset class might appear, maintaining an appropriate balance according to your risk profile can help protect from excessive downside exposure.

Regular reviews and adjustments are essential for effective diversification and asset allocation. Rebalancing can also provide benefits beyond just managing risk. Here are four:

1. Helps Keep Emotions in Check — Rebalancing can remove emotions from buy-and-sell decisions by relying on allocation targets rather than market sentiment. While the principle of “buy low and sell high” seems simple, it may be difficult in practice: stocks are priced low during downturns when fear dominates and investors are focused on selling, not buying. In strong markets, investors may hesitate to sell.

2. Enables Strategic Capital Deployment — Rebalancing doesn’t always mean selling assets. At times, redirecting new cash flow to underweighted areas can restore portfolio balance. This approach offers the added discipline of focusing on potentially undervalued asset classes or sectors, supporting the “buy low” principle by positioning new investments in areas that need more weight.

3. Balances Gains and Losses — Selling an overweight position may trigger taxable gains outside registered plans. These can be offset by selling loss positions or carrying forward past losses. Within registered plans, there will be no tax implications if securities are traded and funds remain in the plan, making asset location an additional consideration when rebalancing.

4. Supports Charitable Giving — As you rebalance, consider the opportunity to “do good” by donating appreciated holdings to a charity, instead of selling them directly, to benefit from the tax opportunity. This not only entitles you to a tax receipt for the fair market value, but also eliminates the associated capital gains tax.

Beyond asset allocation, rebalancing can strengthen portfolio discipline and wealth management. To discuss this, or any other aspect of wealth management, please reach out.