Index funds typically rebalance their underlying investments on periodic basis – usually bi-annually or annually – to ensure their portfolio is in line with their investment parameters and risk policy, making adjustments as necessary.
Because market conditions change over time, review and rebalancing is necessary to ensure a portfolio’s underlying mix of investments are still optimal and risk is not concentrated in a particular area.
For example, your desired asset allocation is 70% stocks and 30% bonds. In a bull market run, your stocks may soar and perhaps grow to 80% of your portfolio. If you wish to maintain your original allocation of 70% stocks, you may need to sell some of your stocks to bring it back to 70%.
As retail investors, how often we should review and rebalance our portfolios depend on our appetite for risk, our portfolio performance, and the market conditions. This enables us to manage our risk and returns.
How Often Should You Rebalance Your Portfolio?
As a long-term investor, you could take a page from the funds and also perform an annual or bi-annual review, which will prevent you from overdoing it and incurring unnecessarily high costs in terms of time and transaction fees.
In addition to this rule of thumb, you need to also consider the type of investor you are and where you have placed your investments. The more hands-on you are as an investor, the more often you should consider doing a portfolio review and rebalance as needed.
Portfolio Relancing For Do-It-Yourself (DIY) Investors
As the master of your own ship, a DIY investor needs to keep a closer eye on their investments. Asset allocation and portfolio rebalancing should be conducted more regularly as you are exposed to more risk on your own.
Depending your risk exposure and available funds for further investments, you can rebalance your portfolio in the following ways.
Sell the overexposed assets and buy the underexposed assets. For example, if your stocks have outperformed and you are now 10% above your desired allocation, you should sell enough of these stocks such that they fall within your desired allocation and lock in your gains.
Invest new money into underperforming asset allocations. If you have extra capital to deploy, instead of selling part of your existing portfolio to rebalance, you can also buy additional assets to achieve the purpose. For example, your stocks have outperformed and is 80% instead of your desired allocation of 70% stocks and 30% bonds, instead of selling your stocks, you can invest new money into bonds to bring up the bond allocation to 30%.
Diversify the winners by selling a portion of the big winner and reinvesting into multiple potential winners. This is to reduce company-specific risk. For example, if your Apple stocks have outperformed and now make up 50% of all your stocks, you can sell a portion to diversify into other assets and reduce your exposure to a single company.
Portfolio Review When You Have A Financial Advisor Managing Investments
If you already have a financial advisor or personal banker acting on your behalf, it is less necessary to review your asset allocation and rebalance your portfolio so closely, since you have fund managers who are paid management fees to do so on your behalf.
However, it might be useful to perform a review with your trusted professional if there are any big, material changes in your life that require a relook at your risk tolerance and goals, so that your adviser can recommend an appropriate asset allocation that works for you.
Investor Who Invested Money With Robo-Advisors
If you have invested with a robo-advisor, your portfolio is automatically rebalanced in accordance to the risk profile they have on file. Instead of rebalancing your portfolio on your own, you calibrate your portfolio by periodically updating your risk profile such that the automated portfolio mix would be an accurate reflection of your actual risk tolerance.
Investors With A Mix Of Everything In Their Investment Portfolios
It is likely that many of us will not fall cleanly into the above categories: you may have a pot of money that you invest with advisors and robo-advisors, and another warchest that you use to invest in individual stocks.
Because of the many layers of investments, we may not realise that we might have unknowingly deviated from our desired risk tolerance and asset allocation
Thus, recommended timespan for portfolio review and rebalancing can be a lot trickier in reality. But the principle of setting aside time to make a thorough review of your portfolio and make any necessary rebalancing would serve you well in your investment journey.
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