5.3 Rebalancing

What this topic covers:

  1. Why should you consider rebalancing?
  2. How often should you rebalance?
  3. What might prompt you to rebalance?

Why should you rebalance?

You may need to rebalance your investment portfolio periodically to ensure that it continues to match your investment goals and lifestyle objectives.

Rebalancing involves buying or selling investments to ensure that the original asset allocation of your portfolio remains steady. Over time, the asset allocation in your portfolio could change because some asset classes may perform better than others. Rebalancing your portfolio will help you return to the original asset allocation that you set out in your investment strategy, so that you're not more exposed to a certain holding or asset class than you want to be.

How often should you rebalance?

The general consensus is that a well-diversified portfolio may need rebalancing every 12 months, especially if you are in an accumulation phase. If you’re in retirement or getting ready for retirement (a de-accumulation phase) your portfolio may need to be rebalanced more often because you’ll have a lower risk tolerance.

It’s worth noting, though, that rebalancing your portfolio too often may incur unnecessary fees, commissions, and possibly tax.

You may not need to rebalance your portfolio every year. However, monitoring it will mean you’re ready to make changes when needed. Regularly assessing what the market is doing and understanding how that could impact your portfolio is a key factor in remaining on target to achieve your investment goals.

What might prompt you to rebalance?

There are a number of reasons why you might choose to rebalance your portfolio, including:

  • Your risk tolerance or goals have changed

  • You’re considering selling and buying new investments

  • To re-weight your asset allocation

  • The relative weight of your portfolio in an asset class or sector has changed because of its performance (e.g. perhaps healthcare stocks used to represent 10% of your share portfolio, but this sector has gone gangbusters and now accounts for 30% of your total portfolio. You might consider selling some of these stocks, or buying new stocks in other sectors, to restore your original balance of 10%.)

Next topic: 5.4 Analysing and measuring risk


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