In the ever-changing landscape of financial markets, volatility and uncertainty can derail even the most carefully constructed portfolios. Portfolio rebalancing is a crucial practice that helps investors steer their investments back on track and maintain alignment with their risk profile and financial goals.
What is Portfolio Rebalancing?
Portfolio rebalancing is the act of realigning the weightings of a portfolio’s assets by periodically buying or selling assets to maintain a desired level of asset allocation. For example, if you intended to invest 60% in equities and 40% in bonds, but rising stock prices shift your allocation to 70% equities and 30% bonds, rebalancing involves selling some stocks and buying bonds to restore your original allocation.
Why It Matters
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Maintains Risk Level: Drifts in asset allocation could expose your portfolio to higher risk than you intended. Regular rebalancing helps investors stay in their chosen risk zone.
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Promotes Disciplined Investing: By sticking to a rebalancing schedule, you systematically buy low and sell high—selling overperformers and topping up underperformers.
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Helps Achieve Goals: Timely rebalancing supports long-term objectives, especially as investors approach milestone events like retirement or major purchases.
How to Get Started
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Set a Schedule: Many investors rebalance quarterly or annually.
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Monitor Drift: Consider rebalancing when allocations deviate by 5% or more from the target.
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Cost-Effectiveness: Factor in transaction costs and potential taxes before executing trades.
At Fiducrest, we help clients automate and optimize their rebalancing strategy to stay aligned with their investment mandate and life changes, making the journey smoother and less stressful for every investor.