Investing is a great way to meet financial goals and safeguard your future. One way to do this is by creating an investment portfolio that has a balance of varied asset classes. Your portfolio should reflect your long-term goals, risk tolerance and time horizon, which will help you decide on an asset allocation that’s right for you. Over time, your circumstances, the risk and return characteristics of asset classes and the actual weightage of the assets in your portfolio, along with the asset prices are bound to change. Rebalancing your portfolio is a way to realign your portfolio to the desired asset balance by selling off any underperforming assets and investing in assets with growth potential.
What is rebalancing?
Rebalancing is the process of adjusting the weights of different assets in your investment portfolio when they differ from their original proportion. There can be different reasons which may require you to change your weights among asset classes. Let’s say your risk tolerance changes, then your portfolio must reflect the change. For example, you initially had more money invested in one asset class, but with demand down, the asset class is underperforming and another asset class is booming. With that new information, you want to move the funds from the underperforming asset class to the other asset class that’s booming. By rebalancing your portfolio this way, you can remain on course to achieve your benchmark investment return.
Reasons to rebalance your portfolio for wise investments
Your benchmark financial goals may change due to market fluctuations and your own risk. Rebalancing your portfolio ensures you have a balance of investment assets that matches your risk appetite and desired financial goals. By shifting funds between different asset classes and rechanneling your funds, you can realign your portfolio with your investment goals without a significant loss. Rebalancing your portfolio can give you clear guidelines for allocating your funds to the suitable asset classes and can help you make affirmative investment decisions.
Tips for rebalancing your portfolio
Keeping your portfolio balanced is key to becoming a smart investor. By rebalancing your portfolio, you can ensure you’re working towards your investment goals by managing your desired risk and keeping your assets balanced.