InvestorQ : Why is the rebalancing of an investment portfolio is important?
ananya Sing made post

Why is the rebalancing of an investment portfolio is important?

1 year ago
When you first start investing, you create a portfolio with a certain risk profile in mind. This will consider your investment timeframe, goals, and financial position. However, over time, even if you don’t buy or sell assets, your initial investment position can change due to market movements.

Rebalancing your portfolio—buying or selling asset classes to restore your portfolio to your original target allocation—is an important step in controlling risk. It requires you to sell investments from the asset class that is performing well (and which now represents an increased percentage of your portfolio's overall value) and buy investments in the asset class that is currently out of favor. Let’s say you set up a portfolio holding 50% stocks and 50% bonds.

Following a period of stocks performing well, your stock allocation could have risen, changing the weighting of your portfolio. It may mean you’re now taking more investment risk than is suitable for you. In this case, rebalancing your portfolio would involve selling stock and buying bonds to achieve the original target allocation.

It’s not just asset allocation that should be considered when rebalancing portfolios. You should also consider the level of risk and diversification. Assets performing well in a certain sector, for instance, could mean you need to rebalance. So, while you are buying and selling assets when rebalancing, it’s not about timing the market or making knee-jerk decisions based on its movements.

Rather, it’s about ensuring your portfolio continues to reflect your circumstances and goals. Rebalancing your portfolio will help you maintain your original asset allocation strategy and allow you to implement any changes you make to your investing style. Essentially, rebalancing will help you stick to your investing plan regardless of what the market does.