What is Rebalancing?
Brian Colombana says rebalancing is the process of resetting the weightings of your investment portfolio back to their original levels. This generally occurs when one or more asset classes in your portfolio have increased or decreased in value relative to others, resulting in your overall asset allocation becoming out of balance.
Why Rebalance Your Portfolio?
There are a number of reasons why you might want to rebalance your portfolio:
To reduce risk:
By bringing your asset allocation back into line, you can help to reduce the overall risk level of your investment portfolio. This is because you will be selling assets that have risen in value (and are therefore relatively more risky) and buying assets that have fallen in value (and are therefore relatively less risky).
To improve returns:
Rebalancing can also have the effect of improving your investment returns. This is because you will be selling assets that have risen in value and buying assets that have fallen in value – meaning that you will be ‘buying low and selling high’. Over time, this should lead to higher returns than if you had simply held on to your original asset allocation.
How to Rebalance Your Portfolio?
There are a number of different ways that you can rebalance your portfolio:
1. Sell the asset/s that have increased in value and use the proceeds to buy more of the asset/s that have decreased in value.
2. Withdraw cash from the asset/s that have increased in value and use it to buy more of the asset/s that has decreased in value.
3. Use new cash injections (such as from your salary or other investments) to buy more of the asset/s that have decreased in value.
4. Switch some of your investment into the asset/s that has decreased in value.
Which method you choose will depend on a number of factors, including your investment goals, risk appetite and time horizon. You should also bear in mind that some methods may incur charges – so it’s important to weigh up the costs and benefits before making any decisions.
When to Rebalance Your Portfolio?
There is no ‘right’ or ‘wrong’ answer to this question – it will depend on your individual circumstances. However, as a general rule of thumb, you should consider rebalancing your portfolio if any one asset class has increased or decreased in value by more than 5% from its original level. This will help to ensure that your portfolio stays well-diversified and doesn’t become too risky.
5. Review your portfolio regularly
Brian Colombana says it’s important to Review your investment portfolio on a regular basis – at least once a year, if not more frequently. This will help you to keep track of how your investments are performing and whether or not they are still in line with your investment goals. It will also allow you to make any necessary adjustments to your asset allocation, as well as rebalancing your portfolio if needed.
6. Seek professional advice
If you are unsure about anything to do with rebalancing your investment portfolio, it’s a good idea to seek professional financial advice. This will help to ensure that you make the best possible decisions for your individual circumstances.
7. Take action
Once you have decided how and when to rebalance your portfolio, it’s important to take action. This might mean selling some investments, buying others, or simply transferring money between different accounts. Whatever you do, make sure that you keep track of all the transactions so that you can monitor the performance of your portfolio over time.
8. Review and adjust as needed
Brian Colombana explains after you have rebalanced your portfolio, it’s a good idea to Review it on a regular basis (at least once a year) to see how it is performing. You may also need to adjust your asset allocation if your circumstances or investment goals have changed.
By following these simple tips, you can help to ensure that your investment portfolio is well-diversified and remains aligned with your investment goals. Regular rebalancing can also lead to higher returns over the long-term – so it’s definitely worth considering if you’re looking to maximize your investment returns.
Conclusion:
Rebalancing your investment portfolio can help to reduce risk and improve returns. There is no ‘right’ or ‘wrong’ time to do it, but as a general rule of thumb, you should consider rebalancing if any one asset class has increased or decreased in value by more than 5% from its original level.