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Market choppiness can be scary, and might tempt you to sell losing investments.
Now yet another study has found that regularly rebalancing a portfolio — selling winners and buying losers — can help preserve your money long term, with less volatility.
T. Rowe Price financial planners modeled the performance of two hypothetical portfolios over the last 20 years: Both held 60 percent in stocks and 40 percent in bonds, but only one was rebalanced annually. Though the portfolios produced nearly identical returns, the one that was regularly rebalanced experienced only three-fourths the volatility of the one left untouched.
"Rebalancing helps take the emotion out of investing," said New York City-based financial planner Hans-Christian Winkler. "During volatile markets everyone has an opinion, but it's your portfolio that should tell you what to do."
Deciding what asset allocation is right for you typically depends on your age and risk tolerance. The conventional wisdom goes that younger investors have more time to make up for losses, and therefore can take on more risk with larger equities exposure. But plenty of older investors may also have a hard time accepting the current lower yields on fixed income — and many folks nearing retirement still insist on holding more stocks than bonds, Winkler said.
One traditional rule of thumb from Vanguard founder Jack Bogle is to "hold your age " in bonds. Most target-date funds rely on some version of this to automatically adjust your holdings as your retirement date nears. But beware of buying without looking under the hood: The average target-date fund didn't do so well in 2015.
As long as you make a thoughtful plan, sticking to it by rebalancing can do more than simply smooth your ride. The T. Rowe study found that during sudden down markets — like the bursting of the tech bubble a decade and a half ago — a rebalanced portfolio may actually return thousands of dollars more.
Of course, that scenario assumes you are comfortable paring back stock holdings just when returns are starting to look hot.
"People can sometimes overdo it with rebalancing, and you still want to make sure you're taking advantage of momentum in sectors," said Dallas-based financial planner Monica Sipes.
The results of the T. Rowe study showed no significant advantage to rebalancing quarterly rather than annually.
Rather than "pushing the button every quarter," investors might consider choosing a calendar date to rebalance once a year when the time rolls around, said Denver-area financial planner Andrea Blackwelder.
"Remember that making changes in your portfolio too often can come with trading costs and taxes," Blackwelder said.