How to Select a Financial Advisor Part 2: Rebalancing and Diversification

How to Select a Financial Advisor Part 2: Rebalancing and Diversification

August 12, 2020

Tagged As: Wealth Management

This article is part two of a two part series focused on how to select a financial advisor and rebalancing and diversifying your investment portfolios.

To view part one of this two part series: click here for "How to Select a Financial Advisor"


Rebalancing your portfolio is the process of adjusting your investments to a target asset allocation or risk level. Investors achieve this by periodically buying or selling assets in their portfolio. Determining when to rebalance is an important decision. Some investors and financial advisors rebalance on a set schedule, such as quarterly or yearly. Others prefer to focus on keeping the percentages of each asset class in their portfolio within certain ranges, such as 60% to 70% stocks.

For example, let’s say an investor’s target allocation is a 60% stock, 40% bond mix in their 401(k) account. If the stock market has a strong year, their portfolio’s allocation may have changed to 70% stock, 30% bonds. While this is a nice portfolio gain, it’s also an increase in their exposure to risk assets (stocks). The prudent investor would rebalance their account in this scenario, because the level of risk they’re taking on has increased since their account has a larger percentage of stocks.

Rebalancing is an important way to ensure you’re trimming back or “taking profits” from assets that have done well. In other words, rebalancing is a way to “buy low and sell high.” When selecting a Financial Advisor, we recommend knowing at the outset what the advisor’s strategy will be for rebalancing a portfolio.

Rebalancing can also have more impact depending on the account type. Retirement accounts such as 401(k)s or IRAs are tax deferred investment vehicles. Realized gains (or losses) do not carry out to the account owner, who is only taxed on distributions from these accounts. Therefore, retirement accounts can be rebalanced without any tax consequences on the sale of assets.

Unlike retirement accounts, taxable accounts such as personal investments report the realized gains (or losses) to the account owner in the year they are incurred. Before rebalancing, it is best to consider the tax implications and adjust any withholdings accordingly.


Diversification, or reducing your risk by spreading your money between many different investments, is helpful in limiting exposure to a single asset or risk. Having a diversified portfolio will not eliminate market volatility, but it can lessen the blow of a down market AND allow your account to recover more quickly when the market rebounds.

As you might expect, managing a well-diversified portfolio can be complicated. One simple, low-cost way to achieve proper diversification is to invest in mutual funds. A mutual fund is a type of financial asset made up of a pool of money collected from many investors. These funds have managers that invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds allow an investor to own several hundred different stocks and/or bonds to provide diversification. Ask your Financial Advisor how diversification is being achieved in your portfolio.


As a local community bank offering Trust and Wealth Management services, we are here to help. For additional questions to our Wealth Management team, feel free to reach out to any of our Trust or Wealth Management Officers at 319-338-1522.

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