Investment portfolio rebalancing means reconstructing your portfolio as per the current individual risk tolerance and investment goals. Just like maintaining your car regularly or going to a doctor for a monthly check-up, portfolio rebalancing is nothing more than regular maintenance of your investments.Read more
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Rebalancing investments means keeping a regular check as just investing and forgetting about it does not work. In this article, we will understand balancing and rebalancing the investment portfolios.
Here are some key features about how rebalancing helps in your investment portfolio
To stay on track with your targeted asset allocation, rebalancing your portfolio is important. Allocation of assets means keeping a percentage of your portfolio in different investments like 30% in stock and 70% in bonds. The percentage depends upon the amount of risk you are willing to take on every investment.
The more stocks you hold the more risk you are putting yourself through in comparison to investing in bonds. But, stocks significantly outperform bonds in the long run. This is the reason most investors go for stocks over bonds to meet their financial goals.
Rebalancing not only means selling your assets at the time of loss, it means balancing your investments when they are doing well. Consider these reasons when you are rebalancing your investments:
There are 3 ways by which you can plan rebalancing your portfolios:
Here are some tips as to how you can rebalance your investment portfolio and make the best of your asset allocations:
In asset allocation, the choice to add more or opt-out of equities depends upon elements such as tolerance of risk and long-term goals. A rising dividend payout ratio over a long period can be a great source of income after retirement.
New investors should avoid investing in mutual funds in a lump sum method. In the lump-sum method, there is a risk of losing a significant amount if the market sees some correction. Instead, investing through Systematic Investment Plans (SIP) is much more suitable and recommended as they allow investors to buy units on a given date each month.
Multi-asset funds of mutual funds such as equity, debt, and gold exchange-traded funds can be a good option for the asset allocation mix. The fund house does the rebalancing and helps the investor to hold a diversified portfolio.
Index funds are those kinds of funds that have stocks of market leaders across different sectors and in which fund manager’s intervention is very limited. So, instead of investing in direct stocks, investing in index funds is more beneficial due to their convenience, liquidity, and ease of investing.
In a nutshell, rebalancing means selling one or more assets and using the proceeds to buy another asset like bonds, stocks, mutual funds, etc. to achieve your desired asset allocation.
Selling high-performing investments and buying low-performing ones for the time being or allocating newly earned money strategically, rebalancing portfolio works wonders if done correctly.
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