Rebalance your portfolio: restore the original allocation
In the investing journey, investors should start o by constructing a portfolio that accommodates their
investment objectives and risk profiles. However, setting up the initial asset allocation is merely a starting point. It is equally important to regularly rebalance the portfolio to ensure the asset weightings are consistent. Overlooking the need to rebalance the portfolio can prevent investors from achieving their long-term investment goals.
Market changes shift portfolio away from initial objective
In an investment portfolio, the relative weights of different asset classes may change due to market fluctuations, which lead to a shifted asset allocation that deviates from the original target. In this case, rebalancing the portfolio will mean restoring the weightings of portfolio assets to the original designed levels.
Portfolio rebalancing: four major advantages
Each asset class has its distinct risk characteristics (e.g., equities usually involve higher risk and potential returns than bonds). Hence, when a portfolio’s asset weightings deviate from the original arrangement, the portfolio’s overall risk profile will change accordingly. By restoring the asset allocation to the initial setting, there are four major advantages:
Two ways to get portfolio back on track
Is there a good timing to rebalance portfolio?
There isn’t a definitive good timing for rebalancing the portfolio. Investors can consider regularly reassessing their asset allocation. Alternatively, they can set a threshold of deviation, and rebalance the portfolio when the asset weighting deviates by a percentage that exceeds the threshold. Some other investors choose to rebalance their portfolios after significant market swings and sharp fluctuations in asset prices.
Hassle-free rebalancing that saves money and time
Managing and rebalancing the portfolio on your own help ensure a consistent asset weighting, but they also involve extra time and transaction costs. To avoid the tedious procedures and trading costs, investors can consider investing in multi-asset funds with a regular rebalancing mechanism that suit their investment objectives.
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