Very rarely can an investor make specific investments and then not look at their portfolio at all for years afterward. Part of portfolio management is evaluating your financial assets and ensuring they remain aligned with your overall goals and matches your risk tolerance. Various factors can lead to the need for rebalancing your portfolio and here are some of the things you need to know about it.
Why Portfolio Rebalancing Is Important
The longer your portfolio has a chance to mature and develop, the longer amount of time it has to drift as well. You may have started with allocating 50% into equities, 20% into real estate, 15% into fixed income, and 15% into cash. Over time, this balance could shift one way or another and requires you to move around some financial assets to fix the portfolio drift.
Another reason why portfolio rebalancing is important is if you intentionally want to change the allocation of your financial assets. Your risk tolerance may have changed or your long-term goals may have shifted significantly. In either scenario, rebalancing your portfolio can ensure the right allocation is in place to meet your goals.
Advantages Of Portfolio Rebalancing
When you rebalance your portfolio, you should be looking at how you can sell high and buy low. Having a diversified portfolio gives you more options in this regard and better opportunities for turning your low purchases into winners over the long-term. Rebalancing your portfolio also ensures your asset allocation remains within your risk tolerance so you won’t be as negatively impacted during a market crash or high levels of market volatility.
Can Rebalancing Hurt Your Portfolio?
Portfolio rebalancing is generally perceived as a good move to make, but it can hurt your portfolio if you aren’t careful with it. For one, you may end up selling too early and miss out on the potential for larger returns. Or you may buy low too often and lose any positive momentum you had going. Plus, some investment accounts charge fees every time you rebalance your portfolio, so this is something to look out for. These factors should not deter you from rebalancing your portfolio when it needs to be, but they should make you think twice about rebalancing too often.
How To Rebalance Your Portfolio
Investors can choose to do a full rebalance or an incremental rebalance with their portfolio management. A full rebalance involves selling a decent portion of winning shares and reinvesting into losing shares to balance the percentages out. An incremental rebalance is ideal for small portfolios since large-scale changes aren’t usually required or necessary. Your financial advisor can help you determine which portfolio rebalancing method suits your situation the best.
Stock Investing Info does much more than simply evaluate stock futures. We help our clients manage their financial assets to meet their goals and analyze when the right time is to rebalance their portfolios. We want to help you stay on track with your investments, so contact us at any time if you have any questions or concerns.