What is Portfolio Rebalancing?
Portfolio rebalancing is the process of realigning your portfolio’s asset allocation back to your target weights. Over time, market movements cause allocations to drift, potentially increasing risk.
Why Rebalance?
- Maintain Risk Level: Prevent overconcentration in any asset
- Buy Low, Sell High: Naturally sell winners and buy losers
- Stay on Track: Align with investment goals
- Control Emotions: Systematic approach reduces emotional decisions
Rebalancing Strategies
Calendar Rebalancing
Rebalance at set intervals (quarterly, semi-annually, annually).
Threshold Rebalancing
Rebalance when allocation drifts by a certain percentage (e.g., 5%).
Hybrid Approach
Check at intervals, rebalance if thresholds exceeded.
How to Rebalance
- Review current allocation
- Compare to target allocation
- Identify overweight and underweight assets
- Sell overweight assets
- Buy underweight assets
- Consider tax implications
Tax Considerations
- Use tax-advantaged accounts when possible
- Harvest tax losses
- Consider new contributions for rebalancing
Conclusion
Regular rebalancing helps maintain your desired risk level and can improve long-term returns through disciplined buying and selling.
