What is Portfolio Rebalancing?

Описание: Webinar: How to Diversify Portfolio https://en.samt.ag/

What is Portfolio Rebalancing?
Many successful investors recommend to rebalance your portfolio. Portfolio rebalancing is the subdomain of buy-and-hold approach of investments.
Why buy-and-hold?
To avoid frequent trading.
You buy-and-hold a security or a portfolio to avoid stock-picking or market timing.
However, a buy-and-hold approach is not literal, meaning, even if you don’t actively make changes to your portfolio, the composition will still drift away because of the market movements. Your investment strategy should govern your portfolio composition. And when market movements cause misalignment between the portfolio composition and investment strategy, it’s time to rebalance.
The basic idea behind rebalancing is simple; you sell, proportionally, the securities which have made significant gains, and buy those that have lost value. This way you should reacquire your original asset allocation. Let’s look at simple example to understand the concept;
Suppose we created a portfolio in January 2017, comprising of 50% stocks, 30% bonds, 10% cash and 10% alternative investments such as gold or bitcoin as you never know what will happen there.
Fast forward to January 2018, you look at the portfolio and realize that the stocks have increased and bonds have decreased. Now your portfolio is 60% stocks, 20% bonds, and we see no change in cash and alternative investment as they are still sitting at 10% each.
It’s time to rebalance.
But wait, why? 60+20+10+10 still equals 100, so why make changes?
You must rebalance because you should to go back to your original asset allocation. And if you’re thinking, well the stocks of gone up, so why sell them? If they have gone up that does not mean that they will go up tomorrow as well.
Remember, developing portfolio is not a hunch, a complete strategy goes into allocating assets in your portfolio, which is why you need to rebalance it to revert back to the original composition.
In this example you will sell some stocks and buy some bonds, to reee-balance. 50% stocks 30% bonds and 10% each for alternative investment and cash.
How often should you rebalance?
On average portfolios are rebalance once in a year. But keep in mind that when you rebalance it costs you money, since you are buying selling securities to rebalance, you incur trading costs.
If you would like to learn in detail how to diversify your portfolio, we have a free webinar on our website, I’ll leave the link in the description.