Interested in learning more about the topics covered in this post? See more of Robyn’s insights on:

When does portfolio rebalancing make sense?

by | Dec 28, 2016 | SELF-PUBLISHED

Skewed asset allocation can change your risk profile

Q – I believe that my investment portfolio is fairly well balanced, with about 60% in equities and 40% in fixed income assets. I do trade from time to time, but generally I stick to a buy-and-hold strategy. But with the recent surge in equities and selloff in bonds, would you recommend rebalancing now? And how often do you recommend rebalancing? – S.D.

A – These days, both bond and equity markets have experienced bouts of intense volatility, so your assets are likely to experience frequent gyrations in valuation. This may cause your asset allocations to stray from your original investment objectives, changing the risk level in your portfolio and affecting longer-term returns.

Rebalancing is a way to realign your portfolio with its intended objective. If you started out a couple of years ago with your portfolio at 60% equity and 40% fixed-income, you will have noticed that fixed-income investments have in many cases declined in value while equities have increased.

You may consequently now be holding a larger equity position overall than you had originally intended to – say 70% or 75% allocation. This over weighs your portfolio in equities beyond your target 60% allocation, and because equities are inherently riskier assets, the distortion has unintentionally raised your portfolio’s overall risk profile.

It’s important therefore to look at your asset allocation at least once a year, and preferably twice a year during periods of higher volatility, to calculate your relative equity and fixed-income allocations. Then rebalance back to your original objectives. You may need to sell some equity positions and buy bonds or vice versa to maintain your original target allocations.

Rebalancing is an important tool you can use to mitigate risk and is a key component of the investing process.

© 2016 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

© 2021 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

Related posts:

SELF-PUBLISHED

Avoid the cryptocurrency gamble

The big difference between investing and speculating Cryptocurrencies, like Bitcoin and Etherium, have been much in the news lately. That’s not surprising, because the quoted value of these...