Portfolio rebalancing is a crucial investment strategy that helps investors maintain their desired asset allocation over time. It involves adjusting the holdings in your portfolio by buying or selling assets to return to the original target allocations. This process plays a key role in managing risk, improving returns, and ensuring that a portfolio remains aligned with an investor’s goals.
Imagine an investor who has decided to allocate 60% of their portfolio to equities and 40% to bonds. Over time, due to market movements, the value of equities may increase more rapidly than bonds, shifting the portfolio to a 70/30 split. To return to the original 60/40 balance, the investor would sell a portion of the equities and reinvest those funds in bonds. This is the essence of portfolio rebalancing.
The primary goal of rebalancing is risk management. While rebalancing may slightly lower potential returns in the short term, it reduces portfolio volatility and improves long-term risk-adjusted returns. Here’s why rebalancing matters:
There are several rebalancing triggers that help investors decide when it’s time to make adjustments:
To ensure that your portfolio stays on track, it’s important to follow best practices:
Portfolio rebalancing is an essential tool for managing risk and ensuring that your investments remain aligned with your financial objectives. By regularly rebalancing your portfolio, you can reduce exposure to risk, capture profits, and improve long-term returns. Whether you use time, threshold, or combination triggers, following a disciplined approach to rebalancing can help protect your investments and provide a better risk-adjusted return. With a clear plan in place, you can navigate market fluctuations and remain on track to meet your financial goals.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
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