Written by - What is Portfolio Rebalancing? Portfolio rebalancing involves adjusting your portfolio to maintain your desired asset allocation, especially after significant market fluctuations.
- Why Rebalancing Is Important:
- Maintain Risk Levels: Over time, some investments may outperform others, causing your risk profile to shift. Rebalancing helps you return to your desired risk tolerance.
- Maximize Long-Term Returns: Rebalancing ensures that you’re selling high-performing assets and buying underperforming ones, potentially enhancing returns over time.
- Improve Diversification: Rebalancing helps ensure that you don’t become too concentrated in a particular asset class or investment.
- When to Rebalance:
- Scheduled Rebalancing: Rebalance your portfolio on a regular schedule, such as quarterly or annually.
- Threshold-Based Rebalancing: Rebalance when an asset class deviates beyond a certain percentage from its target allocation.
- How to Rebalance:
- Review Your Portfolio: Check your portfolio’s asset allocation compared to your target allocation.
- Sell Overweight Assets: Sell assets that have grown too large and buy underweight assets to bring the portfolio back to balance.
- Consider Tax Implications: Be mindful of the tax consequences of selling investments, particularly if you’re holding them in taxable accounts.
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