Portfolio Rebalancing
What are they?
Portfolio rebalancing refers to the periodic adjustment of the assets in an investment portfolio to maintain the desired asset allocation. This involves buying or selling assets with the goal of restoring the target percentages for each asset class (stocks, bonds, real estate, etc.), which were initially defined based on the investor’s investment objectives, risk profile, and time horizon.
Over time, due to market fluctuations, the different assets in the portfolio may increase or decrease in value, altering the original proportion of the investment. Rebalancing helps restore the investment strategy by reallocating capital according to the established goals and risk, minimizing exposure to overweighted or underweighted assets.
Key aspects to consider
Portfolio rebalancing is a key strategy for maintaining proper risk management and ensuring that the portfolio remains aligned with the investor’s financial objectives. When performing rebalancing, it is important to assess whether changes in asset distribution are needed due to market conditions or changes in the investor’s goals.
Some investors prefer to make adjustments annually or semi-annually, while others may choose a more frequent approach, such as quarterly, depending on their risk tolerance and willingness to actively manage the portfolio.
It is important to consider the costs associated with buying and selling assets, as frequent rebalancing can generate commissions or have tax implications, especially in markets with capital gains. Additionally, rebalancing should be done in a disciplined manner to avoid impulsive decisions based on short-term market volatility.