Investment portfolio is an assemblage of securities such as stocks, bonds, and other financial assets that is meant to cover a person after retirement.
Most people face a significant risk during investments but many people tend to be confused whether or not they need to rebalance their investment portfolio.
The fact is that period rebalancing of an investment portfolio is beneficial. Rebalancing ensures that you are able to closely monitor and track your portfolio and avoid it from being affected by sudden surges or setbacks in the market.
Rebalancing is a strategy by which you are able to deal with a situation where the risk level associated with your portfolio has gone up. There is a certain level of risk that you are able to withstand. This is known as risk tolerance and is quite an important aspect of investing. When you rebalance your portfolio you are bringing the risk level of your portfolio to a level equivalent to that of the risk tolerance of your portfolio.
For instance, if your stocks have performed more than well in the market, then naturally, you would be selling these stocks and investing the money in bonds. On the other hand, in a situation where your bonds have performed better than your stocks, you would be selling these bonds and investing in stocks.
The benefits of rebalancing your portfolio
While rebalancing your portfolio does not have an impact on your returns. it is a good way to manage the risks associated with your portfolio. That being said, it is not necessary to frequently rebalance your portfolio. The optimum strategy is to rebalance annually.
It is important to keep track of your investment assets and handle them according to the nature of the current market. For instance if the majority of your investment is in stocks rather than bonds, then in the current market surge, your stocks are likely to go up a considerable amount while your bonds would just be the opposite. This is a situation which could leave you in a bad place if the market goes down. Rebalancing in this case would help you to strike a balance between your assets and helps you to keep your risk tolerance at a level with which you are comfortable.
Rebalancing is a good way to ensure that you are protecting your valuable assets and to invest in assets that are currently low performing but have the potential to yield better returns in the future.