WHAT DOES REBALANCING MEAN FOR YOUR PORTFOLIO?

As your financial advisor, we have established a target asset allocation that we use as a roadmap for meeting your investment needs. From the onset of your investment relationship with Pile Wealth Management, this target asset allocation is established based on factors such as age, investment time horizon, risk tolerance, the designated goals for the investments, and the yield on the investments necessary to meet the designated goals. Part of our role as your investment advisor is to determine how your assets need to be invested over various asset classes to best meet your investment needs over your established investment time horizon. To properly assist you in investing, we have to quantify what percentage of your assets should be invested in each asset class to meet your investment goals. Once established, this is what we call your target asset allocation and this model is typically what we use to start your investment journey with Pile Wealth Management.

After initial investments are made within your account and the investments then become subject to market movement and volatility, the percentage of assets that you hold within each asset class will move around. For example, if large cap stocks are performing very well over a period of time, your portfolio will likely become more heavily weighted in these large cap stocks. If the market is allowed to move your portfolio mix without any intervention, the portfolio mix that you end up with may look nothing like the target asset allocation that was originally established to meet your investment needs. The results of having an allocation looking nothing like your target asset allocation can be very detrimental and hinder you achieving your long-term investment goals.

As such, we are always monitoring your portfolio and are always watching the movement within each asset class toward and away from the target percentage we initially established for that particular asset class. We establish parameters to allow for a certain amount of deviation away from the target percentage. We allow some movement away from the target because it could become very expensive if we bought or sold for every little deviation so that we were holding your exact target percentage for each asset class at all times. For example, if we have established your target percentage for US Large Cap stocks as being 10%, we would take action as a general rule if your percentage of assets in US Large Cap stocks was less than 7.5% or greater than 12.5%. This action that we take is called rebalancing and is critical to an efficiently managed portfolio.

Rebalancing is necessary because markets are not constant. As your advisor, we establish a portfolio allocation that will help you best meet your investment objectives. This portfolio is based on historical data and is a scientific approach to investing in volatile markets. Rebalancing provides discipline in the sense that we pull in the reigns on the market – we allow it to work without constraint for so long and then we do some maneuvering so that your portfolio does not change shape without justifiable reason. We establish a target asset allocation with specific objectives in mind. Rebalancing is the tool that allows us as your advisor to maintain this target asset allocation to continuously meet those objectives.

If you have any questions about your current target asset allocation, please feel free to contact us.