Q – My mutual fund portfolio is fairly balanced. I trade off and on but stick to a buy-and-hold strategy for the most part. How often do you recommend rebalancing my portfolio? Sharon T., Toronto, Ontario
A – When you invest in mutual funds you are investing in the markets. These days, the markets in both bonds and equities are quite volatile, so you will experience gains and losses on a frequent basis. 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. As an example, say you started out a couple of years ago with your portfolio at 60% equity and 40% fixed-income. Recently, fixed-income investments have in many cases grown in value while equities have declined. You may consequently now be holding a larger fixed-income position than you intend to. It’s important to look at your portfolio at least once a year, and preferably twice during periods of volatility, to calculate your relative equity and fixed-income allocations and 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 a tool to mitigate risk and is a very important part of the investing process. – R.T.