Importance of rebalancing your portfolio
So you’ve decided on an asset allocation strategy that works for you, but at the end of the year, the weighting of each asset class in your portfolio has changed. What exactly went wrong?
Over the course of the year, the market value of each investment in your portfolio earned a different return, resulting in a weighting change. Adjusting asset weightings is part of the rebalancing process for an investment portfolio. It’s similar to getting a car tune-up in that it allows customers to keep their risk levels in check and mitigate risk.
Rebalancing: What Is It and How Does It Work?
The process of buying and selling components of your portfolio to restore each asset type to its original weighting is referred to as rebalancing. If an investor’s investing strategy or risk tolerance has changed, rebalancing can be used to rearrange the weightings of each security or asset class in a portfolio to suit a newly developed asset allocation.
Many investors, on the other hand, are still heavily invested in last year’s “winning” fixed-income fund and are considering decreasing their holdings in last year’s “losing” fixed-income fund. Because equities are more volatile than fixed-income instruments, there is a high possibility that last year’s significant gains could be reversed this year.
Many investors feel that if an investment performed well the previous year, it will continue to do so in the following year. Unfortunately, past results may not always anticipate future outcomes. One has to diversify and rebalance the portfolio in order to stay up to the mark with the moving market.
When you rebalance your portfolio, you can keep your initial asset allocation plan while also making any necessary changes to your investing strategy. Rebalancing can also help you keep on track with your investing strategy no matter what the market circumstances are like, allowing you to stay within your risk tolerance levels. Rebalancing your portfolio not only keeps you safe from high volatilities but also gives your portfolio a fair chance to outgrow nominal profits and gain supernormal returns.