The Key Ingredient to a Balanced Portfolio

When I’m not busy reviewing client investment portfolios or researching fund options, in my spare time I’m an avid cook and baker. I love to compose a gourmet dinner or whip up my favorite batch of chocolate chip cookies from scratch. Over the years I’ve compiled tried and true recipes that I can rely on to be crowd pleasers.

As a member of the BrightPlan Investment Committee, we spend a lot of time in the kitchen developing investment strategies for clients. A lot of thought and academic research went into creating each globally diversified portfolio. The end result is each of your goals getting its own Investment Plan, with a hand-picked mix of funds as the individual ingredients.

But that’s just the beginning of the work we do for you. Every day as clients fund their BrightPlan Accounts I oversee trading, making sure every account accurately reflects it’s Investment Plan. So today I’m going to let you into the kitchen to see how we rebalance BrightPlan Investment Accounts, because a lot of thought and effort goes into a well-balanced portfolio.

What is Rebalancing?

The notion of rebalancing is simple. In a diversified portfolio, some of your investments will zig while others zag. During one month, bonds may rise while stocks fall. The next month international stocks may stay flat while U.S. stocks rise. This actually benefits you as an investor, but it also means your account is nearly always straying from your Investment Plan. That’s where rebalancing comes in.

We regularly review every account to compare your actual holdings (say 70% stocks and 30% bonds) to your Investment Plan (say 80% stocks and 20% bonds). Rebalancing is how we re-adjust your portfolio to the recommended Investment Plan as markets change over time. Disciplined rebalancing benefits investors by taking emotions out of play, right-sizing your risk, and keeping your money working for you.

Rebalance to Buy Low and Sell High

We don’t know if the market will be up or down on any given day, but we do know over time we will experience extended periods of both. Not only does this influence our portfolio, but it takes us on an emotional roller coaster as well. If we let those emotions take control, it’s easy to fall into the classic investor mistake of “buying high and selling low” which will result in a less than ideal outcome. 

In your BrightPlan account, we help you avoid the emotional traps by taking advantage of the market cycles in different asset classes. Think about how rebalancing works. If stocks have a great year and rise a lot compared to bonds, your portfolio will drift to have more stocks than we recommend.

To rebalance your account we would “sell high” by dialing back some the stock holdings. We’d also purchase more bond funds, the asset class that is on "sale." We all love a good sale, so why wouldn’t we take advantage of that in our investment portfolio?

Rebalancing Risk

Let’s go back to our original example, where you receive an Investment Plan of 70% stocks and 30% bonds. When stocks do well and your overall mix shifts to 80% stocks and 20% bonds. You didn’t change a thing, but your portfolio just got riskier. More stock market risk could make it harder to complete the goal in the same timeline due to more market volatility.

Rebalancing solves this issue, as the Investment Committee created bands around each fund and asset class in your Investment Plan. If your portfolio ever moves out of those bands, we make the trades necessary to bring your account back into balance, and your risk in line with your goal.

Rebalancing Dividends and Deposits

While you’re busy stashing away cash for your future, we’re hard at work putting it to use to rebalance your investment portfolio. We use each deposit or dividend distribution to purchase the most underweight asset class, buying what’s on sale to give you the best chance to grow your money over time.

The more frequently you make deposits, the easier it is for us to invest tax-efficiently. Monthly deposits give us flexibility to buy funds that are underweight with fresh cash. Otherwise, we may need to sell funds in your portfolio, which could create capital gains and a larger tax bill for you.

The low, unlimited trading fee we negotiated with TD Ameritrade makes all of this possible. Because you aren’t paying a commission for every trade we can prioritize keeping your account invested appropriately, no matter how large or small your account balance might be.

Let Us Do the Cooking

Even though I love to cook, there’s nothing like going to a nice restaurant and not having to lift a finger to buy the ingredients, prepare the meal, or clean the dishes. Here at BrightPlan, we take care of building portfolios, monitoring them daily, and rebalancing them regularly so that smart investing is effortless for you. It’s one less thing you have to worry about. 

We’ve created a recipe, and rebalancing plays a key role in keeping your BrightPlan Investment Accounts appropriately invested for your goals, no matter what is happening in the markets.