What is Portfolio Rebalancing?

Investing is not a one-time activity. You must put in a lot of effort when selecting investments for your portfolio. Is it enough to have a well-constructed investment portfolio? You can't assume that your job is done once you have a well-constructed investment portfolio. It is important to review your investment portfolio from time to again to ensure that it is still in line with your risk-return profile. If your portfolio is not meeting your return expectations or risk profile, you will need to adjust it accordingly. This is the purpose of portfolio rebalancing.

Let's dive deeper into this topic and find out what portfolio rebalancing means, how portfolio rebalancing strategies work, and when it is necessary to rebalance your portfolio.

Portfolio rebalancing : What's it all about?

Let's start with the basics to understand the meaning of portfolio rebalancing. Portfolio rebalancing allows you as an investor to modify your portfolio's asset allocation. This is necessary because each asset class's money fluctuates as the markets change and the economy changes.

Portfolio rebalancing strategies are generally about buying more assets in one investment class or selling some assets in another investment category. This continues until the original asset allocation target is reached again.

Let's take a look at an example to better understand what portfolio rebalancing means. Let's say that you are moderately risk-tolerant. So, you choose to allocate 50% equity and 50% in bonds as your initial target asset allocation. If stocks do poorly over time, the portfolio will lose 30% of its weight. To restore the original asset allocation of 50% equity, 50% debt, you will need to buy more stocks. This is how portfolio rebalancing works.

When is it time to rebalance your portfolio.

Once you have a better understanding of what portfolio rebalancing means, it is time to ask the big question: When should portfolio rebalancing occur? There are usually several triggers that require portfolio rebalancing.

Here are some examples of situations that could arise when you might need to review your portfolio and see if it is still in line with your goals.

Changes to your risk profile

You may have been an aggressive investor when you first created your investment portfolio. However, you might have been open to taking on more risk. Your risk profile may have changed over time. Your tolerance to risk may have decreased, which could make you a more cautious investor. Portfolio rebalancing is necessary in such cases, when your risk profile changes.

A new financial goal is on the horizon

You may find that your financial goals change over time. For example, if you have a child, you may need to set aside money for college tuition. You may need to review your portfolio if you add new goals to your investment objectives. Portfolio rebalancing is an option if your portfolio is not well-equipped.

Retirement is fast approaching

It is important to make sure your investments are aligned with your retirement goals as you approach retirement. To reach the target corpus you desire, rebalancing your investments might be necessary. If you are just a few years away from your big day, it is worth reviewing your portfolio and using portfolio rebalancing strategies to adjust asset allocations if necessary.

Portfolio rebalancing strategies - How to rebalance your portfolio.

Your investment goals and needs will determine how you want to rebalance your portfolio. These steps will help you to understand the process.

1. Set up a target asset allocation. To ensure that your asset allocation is in line with your investor profile, you should consider your life goals, risk appetite, and retirement goals.

2. Your asset allocation will determine the composition of your investment portfolio.

3. To ensure that your portfolio is still in line with the original target allocation, you should review it every six months or annually.

4. You should also revisit your asset allocation targets periodically to make sure they are in line with your life goals.

5. If your target allocation is not reached, you might need to buy new units or sell existing assets until the correct asset allocation is achieved.

Conclusion

A financial advisor is a great resource if you are unsure how to rebalance your portfolio. These advisors can help you determine the best asset allocation for you investor profile and can also assist you in deciding which assets to sell or buy.