Your target asset mix

It all starts with your target asset mix—the mix of stocks, bonds, and other investments in your portfolio. After getting to know you, our advisors select your target asset mix to complement your risk tolerance, time horizon, and long-term goals so you can achieve your objectives without being exposed to too much (or too little) risk.

Once our advisors determine your target asset mix, they choose investments for your portfolio that provide you with a diversified selection of stocks, bonds, and other investments that matches your target asset mix.

For example, say your target asset mix is 50% stocks and 50% bonds. If you have $100,000 to invest, our advisors may recommend investing $50,000 in stock funds and $50,000 in bond funds.

Your target asset mix shouldn’t be impacted by market movements or current economic conditions. It should be evaluated when you experience a significant change in lifestyle, such as having a child, changing jobs, or retiring. Our advisors will reevaluate your target asset mix if you experience a personal event that could impact your risk tolerance, time horizon, or goals.

Your current asset mix

This is the actual mix of stocks, bonds, and other investments you hold in your portfolio at any point in time. Unlike your target asset mix, your current asset mix is impacted by market movements and current economic conditions.


Although your current asset mix may have initially looked identical to your target asset mix, it may drift from your target over time as real-life market conditions impact your portfolio.


Continuing with the example above, let’s say your portfolio―which holds $50,000 in stock funds and $50,000 in bond funds―isn’t rebalanced for 4 years. If stocks return an average of 8% a year and bonds return an average of 2% a year during that time, your portfolio balance would be around $122,000, and your current asset mix would’ve drifted from 50% stocks/50% bonds to about 56% stocks/44% bonds.

What happened? One asset class (stocks) outperformed another (bonds), so your portfolio became overweighted in stocks.

The need to rebalance

When your current asset mix strays from your target, you may be subjecting yourself to a level of risk (either too much or too little) that doesn’t align with your long-term goals. Although having a higher-than-planned allocation to stocks may seem great when the market is up, you have to consider the inevitable: What goes up can also come down.

Rebalancing your portfolio realigns your current asset mix with your target mix. This can increase the likelihood that your portfolio will expose you to an acceptable amount of risk and deliver the returns you need to achieve your long-term goals.

Our advisors monitor your portfolio and know not only when to rebalance, but how to rebalance to ensure that you remain on track to reach your long-term goals.

The mechanics of rebalancing

Our advisors may buy more of the underrepresented asset class (or sell some of the overrepresented asset class) to realign your current asset mix with your target. In the example above, an advisor may buy bonds or sell stocks to bring your portfolio back in balance.

Rebalancing can be a counterintuitive process. It can be hard to sell shares of a high-performing investment to buy additional shares of a lower-performing investment, but we feel it’s necessary. Our advisors understand that maintaining your target asset mix―which was carefully selected based on your goals, time frame, and risk tolerance―is the best way to keep your risk level in check. They’ll help you manage your emotions so you don’t abandon a well-thought-out plan.

The frequency of rebalancing

If your portfolio exposes you to too much (or too little) risk when it drifts from your target asset mix, you might wonder why our advisors don’t rebalance your portfolio more often.


Our advisors compare your current asset mix with your target mix every 3 months. If there’s a difference of 5% or more between them, it’s time to rebalance.


That’s because rebalancing more than every 3 months could have unintentional consequences. For example, rebalancing too frequently within a taxable (nonretirement) account could unnecessarily increase your capital gains taxes if an advisor sells assets that have appreciated in value.

The power of rebalancing

Over time, the factory-installed weights around the wheels of your car can shift, causing your tires to become unbalanced. A mechanic can rebalance your tires to restore equilibrium, which reduces unwanted vibration and makes it easier for you to keep your car on course.

It’s the same with your portfolio. Over time, your current asset mix drifts from your target asset mix. An advisor can rebalance your portfolio to restore equilibrium, which reduces unwanted risk and ensures you stay on track to achieve your goals.

Knowing the ins and outs of rebalancing can give you a better understanding of how our advisors maintain your portfolio. As for your car … kick the tires and go from there.

View our article on the anatomy of our methodology »

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in bonds are subject to interest rate, credit, and inflation risk.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

We recommend that you consult a tax or financial advisor about your individual situation.