Rebalancing your portfolio
‘Rebalancing’ is the process of periodically adjusting your asset allocation to maximize long-term returns. If you’ve ever bought a stock or an exchange-traded fund (ETF) impulsively and wished you had more in that sector, then you’ve experienced the same emotions proactively rebalancing your portfolio can bring. If your portfolio is too heavily invested in one area or another, rebalancing can help you shift towards a more neutral balance.
Rebalancing also helps ensure that your investments are remaining as diversified as possible over time; if you own only one exchange-traded fund (ETF) for instance, there’s a higher chance that your entire investment will be tied up in that one security rather than being spread across many different securities. Read on to find out more about how rebalancing can help you unlock greater returns from your investments.
Why rebalancing is important
Rebalancing is optional: you don’t have to do it, but if you don’t, the results can be far worse than simply leaving it alone.
It’s good to note that rebalancing is a critically important part of the investment process. Investing is all about balancing risks and returns, and one of the ways you can balance these two key components is by rebalancing your portfolio. When you rebalance, you take the assets you have in your portfolio that are currently overweight in one area, and you move them over to a more weighted position in other assets with similar return potential. It’s like taking one hand off the wheel and letting your car veer off the road, but then snapping back into place and getting back on the track again. A properly rebalanced portfolio will have a more balanced mix of stocks and bonds because you’ll be selling a few more bonds to take on more stocks. A properly rebalanced portfolio will have fewer investments in high-risk/high-reward areas and more investments in more stable, but still high-reward areas.
How to rebalance your portfolio
Rebalancing can be done manually or through an online rebalancing service. Online rebalancing services will typically charge a small fee to do the work for you, while manual rebalancing will require some time and effort on your part. Either way, the goal is to periodically take the assets that are overweight and underweight, so that they end up weighted appropriately. To rebalance your portfolio, add new investments that are overweight, and sell off the old investments that are underweight. Use the proceeds from those sales to make new investments. Likewise, take the profits from your investments and use them to buy new investments.
How often should you rebalance?
You’ll want to rebalance your portfolio at regular intervals, such as once per year or once per quarter. This will ensure that your portfolio is well balanced and isn’t too heavily weighted in any one area. It’s better to do it at least annually and usually once per quarter, but you can certainly do it more frequently if you want to.
Should you do a full or partial rebalancing?
Rebalancing is usually done as a full rebalancing. This means that all your assets are sold and then all new assets are bought, and their proportions are changed. You can also rebalance your portfolio either by selling off some assets and buying others or by just selling some assets and not buying others. The key is to change your proportions slightly to get them back to where they should be.
Is rebalancing right for you
Rebalancing is an important part of the investment process, but it’s not for everyone. If your goal is to maximize returns as soon as possible, then rebalancing isn’t for you. It takes time, and the profits from selling certain investments may take some time to realise. If you’re more interested in minimizing risk, then you should rebalance. A properly rebalanced portfolio will have a more balanced mix of stocks and bonds because you’ll be selling a few more bonds to take on more stocks.
Conclusion
Rebalancing is easy to implement and can have a dramatic impact on your returns. It’s important to keep your investments in check and rebalance them if they become too heavily weighted in one area. The best time to rebalance is when you sell an investment, or when the market makes a significant move. If you don’t rebalance, you risk losing the benefits of diversification and may miss out on investment opportunities that arise from market volatility. That’s why rebalancing is so important!
Want to learn more, speak to a Redwood financial adviser today, call 07000330330 or send us a WhatsApp message on 07055554900.
