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Hello, everyone! Today, we’re tackling a topic that might sound more complicated than it really is: What is Portfolio Rebalancing?
The Balancing Act of Investing
Imagine you’re walking a tightrope. On one end, you’ve got your risk tolerance, and on the other, your investment goals. The perfect balance? That’s where portfolio rebalancing comes into play. It’s essentially the investing equivalent of readjusting your stance on that tightrope to ensure you don’t lean too much into risk or too far away from your goals.
Why Rebalance?
Markets move, and so does the value of your investments. A perfectly balanced portfolio at the start of the year could, by year-end, tilt more heavily toward certain assets than you originally intended. This imbalance could mean you’re either taking on too much risk or not enough, potentially derailing your investment objectives.
The Rebalancing Process: A Simple Breakdown
Here’s a step-by-step guide on how portfolio rebalancing works:
1. Set Your Targets
It all starts with knowing your ideal asset allocation. For example, you might decide on a classic 60% stocks and 40% bonds split.
2. Check the Scales
Periodically (annually or semi-annually are good benchmarks), you’ll review your portfolio to see if your actual allocation has drifted from your targets.
3. Make Adjustments
If you find your portfolio has strayed (say, stocks are now 70% of your portfolio due to a market upswing), you rebalance by selling off some stocks and buying more bonds to return to your 60/40 split.
Why Not Just Set It and Forget It?
If you leave your portfolio unchecked, you might end up with a risk level that’s no longer aligned with your comfort zone or investment goals. Regular rebalancing keeps you tethered to your financial objectives, ensuring that your investment strategy evolves with you.
The Casual Investor’s Guide to Rebalancing
1. Keep It Simple
You don’t need to rebalance constantly. Once or twice a year is typically sufficient.
2. Consider Costs
Remember, buying and selling assets isn’t free. Consider transaction costs, taxes, and any potential fees before you rebalance.
3. Stay Flexible
Life changes, and so will your financial goals. Adjust your target asset allocation as needed to reflect your current financial situation and future aspirations.
So, What Now?
Armed with the know-how on portfolio rebalancing, you’re now ready to keep your investments aligned with your goals, no matter how the markets sway. The aim here isn’t to chase returns but to maintain a level of risk you’re comfortable with, ensuring your investment journey is both successful and stress-free.
Before You Go…
Feeling overwhelmed? It’s a lot to take in, and it’s totally fine to seek out a bit of guidance. Whether you’re a seasoned investor or new to the game, there’s always something new to learn. Check out the Fund Launch Blog to learn more of the basics!
So, what is portfolio rebalancing? It’s the strategy of bringing a portfolio that has deviated away from one’s target asset allocation back into alignment.
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
