{"id":22425,"date":"2020-05-28T12:23:17","date_gmt":"2020-05-28T11:23:17","guid":{"rendered":"https:\/\/traders-paradise.com\/magazine\/?p=22425"},"modified":"2020-07-17T07:22:24","modified_gmt":"2020-07-17T06:22:24","slug":"investment-portfolio-rebalancing-why-should-we-do-that","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/","title":{"rendered":"Investment Portfolio Rebalancing &#8211; Why Should We Do That?"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#Even_if_youre_a_less_aggressive_investor_you_should_rebalance_your_portfolio_at_least_once_a_year\" >Even if you&#8217;re a less aggressive investor, you should rebalance your portfolio at least once a year.<\/a><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><ul class='ez-toc-list-level-6' ><li class='ez-toc-heading-level-6'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#By_Guy_Avtalyon\" >By Guy Avtalyon<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#Why_is_investment_portfolio_rebalancing_important\" >Why is investment portfolio rebalancing important?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#The_drawbacks_of_investment_portfolio_rebalancing\" >The drawbacks of investment portfolio rebalancing<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#The_real-life_example\" >The real-life example\u00a0<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#Why_rebalancing_your_investment_portfolio\" >Why rebalancing your investment portfolio?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#What_if_some_of_the_investments_grow_in_value_while_others_decline\" >What if some of the investments grow in value while others decline?\u00a0<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/investment-portfolio-rebalancing-why-should-we-do-that\/#How_often_should_you_do_that\" >How often should you do that?<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"Even_if_youre_a_less_aggressive_investor_you_should_rebalance_your_portfolio_at_least_once_a_year\"><\/span><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-22426\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2020\/05\/rebalancing-t-1.jpg\" alt=\"Investment Portfolio Rebalancing - Why Should We Do That?\" width=\"800\" height=\"533\" \/><br \/>\n<strong>Even if you&#8217;re a less aggressive investor, you should rebalance your portfolio at least once a year.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<h6><span class=\"ez-toc-section\" id=\"By_Guy_Avtalyon\"><\/span><a href=\"https:\/\/www.linkedin.com\/in\/guy-avtalyon-67941b54\/\">By Guy Avtalyon<\/a><span class=\"ez-toc-section-end\"><\/span><\/h6>\n<p><span style=\"font-weight: 400;\">You invested your hard-earned money for the long term, you added your lovely stocks, bonds, whatever, and thought everything is done and suddenly somebody told you&#8217;ll need investment portfolio rebalancing. What? Should you find an accountant? What you have to do? How to perform that investment portfolio rebalancing? What does it mean, at all?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">That is the main key, the fundamentals of investing. You have to do two main things: building it and investment portfolio rebalancing.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/concentrated-stock-portfolios-are-they-risky\/\"><span style=\"font-weight: 400;\">investment<\/span><\/a><span style=\"font-weight: 400;\"> portfolio is a collection of your investments. You hold stocks, bonds, mutual funds, commodities. The allocation of the assets you own has to be done based on your risk tolerance and your financial goals. But nothing is finished with the moment you bought your lovely assets. It is just a beginning. After a few years or sooner you&#8217;ll notice that different assets generate different returns and losses as well. Some stocks may have nice and high returns, so they become a large part of your portfolio. Much bigger than you wanted.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Assume you built up a <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/02\/the-60-40-portfolio-is-dead-how-to-replace-it\/\"><span style=\"font-weight: 400;\">60\/40<\/span><\/a><span style=\"font-weight: 400;\"> portfolio where 60% were in stocks. But after some time, you found that the value of those stocks represents over 80% of your portfolio&#8217;s overall value. What you have to do? Honestly, it is <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2019\/09\/how-often-to-check-the-investments\/\"><span style=\"font-weight: 400;\">the right time<\/span><\/a><span style=\"font-weight: 400;\"> for investment portfolio rebalancing.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investment portfolio rebalancing means that you have to adjust your investments, you have to change the asset allocation of the portfolio to obtain your desired portfolio outlook.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_is_investment_portfolio_rebalancing_important\"><\/span><b>Why is investment portfolio rebalancing important?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">It will help you to keep your desired target asset allocation. In other words, to keep the percentage of assets you want to hold adjusted to your risk tolerance and to earn the returns you need to reach your investment goals. If you hold more in stocks, you\u2019re taking on more risks since your portfolio will be more volatile. That might have a bad influence on your portfolio because the value will change with changes in the market.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But stocks look like a better investment than bonds due to their ability to outperform bonds as a long-term investment. That is the reason to hold more stocks than bonds in your portfolio but as a reasonable portion to avoid additional risk.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In periods when the stock market performs well, the portfolio\u2019s money value that\u2019s come from stocks will grow along with stock price rise. We already mentioned this possible scenario when your 60% of holdings in stocks rise to over <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/02\/80-20-investing-rule-pareto-principle\/\"><span style=\"font-weight: 400;\">80%<\/span><\/a><span style=\"font-weight: 400;\">. This means your portfolio can become riskier. So, you&#8217;ll need investment portfolio rebalancing. How to do that? Simply sell stocks until you manage them to represent 60% of your portfolio. For the money received from that selling, you can buy some less volatile assets such as <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/trading-bonds-how-to-start-making-money\/\"><span style=\"font-weight: 400;\">bonds<\/span><\/a><span style=\"font-weight: 400;\">, for example.\u00a0<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_drawbacks_of_investment_portfolio_rebalancing\"><\/span><b>The drawbacks of investment portfolio rebalancing<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">However, there are some problems if you rebalance your portfolio during the time when the markets are doing well. Even more, it can be hard to sell stocks that are doing well, they are your winners and their prices might go even higher. What if you miss huge returns?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But consider this. What if they drop and you lose an important amount of money? Are you okay with that?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Remember, every time you sell any asset that is an excellent player, you are actually locking in gains. That&#8217;s real money and you can use it to obtain some stocks that are not such a good player but you&#8217;ll buy them at a bargain. Do you understand what you actually did? You sold high and bought low. You&#8217;re every single investor&#8217;s dream. You made it happen!\u00a0<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"The_real-life_example\"><\/span><b>The real-life example<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Our example of rising to 80% is rather drastically than a realistic one. Investment portfolio rebalancing ordinarily means selling 5% to 10% of your portfolio. We are pretty sure you are able to choose 5% of your winners and to buy some current losers but in the long run also winners. Investors usually buy bonds instead of stocks when rebalancing their portfolios.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investment portfolio rebalancing is important because it provides you balanced asset allocation and, what is also important, in this way you&#8217;ll avoid additional volatility of your portfolio. If you&#8217;re the risk-averse type of investor this added risk might produce bad investment decisions. For example, you might sell stocks at a loss.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investment portfolio rebalancing is the best way to follow your financial plan and obtain the best returns adjusted to your <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/01\/7twelve-portfolio-craig-israelsen-strategy\/\"><span style=\"font-weight: 400;\">risk<\/span><\/a><span style=\"font-weight: 400;\"> tolerance. Anyway, you don&#8217;t need to be overweight in stocks because the markets are <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/05\/cyclical-or-non-cyclical-stocks-where-to-invest-during-a-recession\/\"><span style=\"font-weight: 400;\">cyclical<\/span><\/a><span style=\"font-weight: 400;\">, and it could be a matter of time when the next reverse will come.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"Why_rebalancing_your_investment_portfolio\"><\/span><b>Why rebalancing your investment portfolio?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Let us ask you. Are you having a car? Do you change the oil or broken parts from time to time? The same is with your investment portfolio even if it is the best created. As we said, the markets are cyclical and some parts of your portfolio might not play well in every circumstance. Why should you want to hold a stock that isn&#8217;t able to meet your investing goals or you bought it by mistake?<br \/>\n<\/span><span style=\"font-weight: 400;\">It isn&#8217;t hard to rebalance your portfolio, at least once per year. In short, that is investment portfolio rebalancing. <\/span><span style=\"font-weight: 400;\">If you think your investment portfolio is well-diversified among asset classes, just think again. Maybe it is <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/01\/diversification-is-important-to-your-investment-portfolio\/\"><span style=\"font-weight: 400;\">diversified<\/span><\/a><span style=\"font-weight: 400;\"> among asset classes but is it diversified within each asset class?<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, why would you like to hold only Swiss biotech stocks? There is no reason. Moreover, it can be dangerous. It can hurt your investment portfolio a lot. It is better and safer if you hold a mix of different stocks, domestic and foreign from different sectors.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"What_if_some_of_the_investments_grow_in_value_while_others_decline\"><\/span><b>What if some of the investments grow in value while others decline?<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">In the short term, it is good. In the long run, it can be a disaster. That is the reason to rebalance your portfolio promptly and properly. Otherwise, your portfolio will be hurt as well as your overall returns.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, you own 50% in stocks and 50% in bonds. Sometime later, your stocks performed unsuccessfully and their value is lower now, but bonds performed outstandingly. So, what do we have here? Bad performers &#8211; stocks at lower value and bonds as excellent players at a higher value. Would you think to change the proportion in your portfolio? Of course, you would. So, what do you need to achieve that?\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let&#8217;s examine a different mix. For example, you may rebalance your portfolio and now it will be 40% in stocks and 60% in bonds.\u00a0<\/span><span style=\"font-weight: 400;\">But what is the consequence if you don&#8217;t rebalance your portfolio and stay with your initial mix? You will not have enough capital invested in stocks to profit when stocks come growing back. Your <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/good-returns-on-investment-how-to-know-where-to-invest\/\"><span style=\"font-weight: 400;\">returns<\/span><\/a><span style=\"font-weight: 400;\"> will be below expected.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">What if stocks were growing in value while bonds did unsuccessfully? Or, what if your portfolio turned into a collection of 60% stocks and 40% bonds, and quickly the stock market dropped? You&#8217;ll have greater losses, much bigger than it is possible with rebalanced the 50\/50 mix. In short, you had more money in stocks. Your long-term gains are in danger.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To make a long story short, when rebalancing, you have to cut the over-performing stocks and buy more underperforming assets. The point is to sell overvalued stocks and buy less expensive but with good prospects. Do you understand this? We came up again to the winning recipe: buy low, sell high.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"How_often_should_you_do_that\"><\/span><strong>How often should you do that?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">The answer is short, once or twice per 12 months mostly. Markets are cyclical and unpredictable. However, if you rebalance at an uncertain period of the year you&#8217;ll put your money at risk. Never avoid rebalancing your portfolio after significant market moves. Follow a 5-percent rule. Your <\/span><a href=\"https:\/\/en.wikipedia.org\/wiki\/Investment\"><span style=\"font-weight: 400;\">investments<\/span><\/a><span style=\"font-weight: 400;\"> should be within 5% of where they were when you build your portfolio. <\/span><span style=\"font-weight: 400;\">For example, if your initial portfolio was with 60% in stocks (you were smart to buy good players) and after several months they changed to 65% or over, it&#8217;s time to rebalance. In case you weren&#8217;t so smart and you bought poor performers and they changed to 55% or below, it is also time to rebalance. You have to prevent your portfolio from fluctuating more than 5%.<br \/>\n<\/span><span style=\"font-weight: 400;\">That&#8217;s the whole wisdom.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Even if you&#8217;re a less aggressive investor, you should rebalance your portfolio at least once a year. By Guy Avtalyon You invested your hard-earned money for the long term, you added your lovely stocks, bonds, whatever, and thought everything is done and suddenly somebody told you&#8217;ll need investment portfolio rebalancing. What? Should you find an [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":22427,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1013,1012],"tags":[1993,281,1990,1722,264,128,1991,273,151,1992],"class_list":["post-22425","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stocks","category-traders-secrets","tag-how-to-manage-investment-portfolio","tag-investment","tag-investment-portfolio-rebalancing","tag-investment-strategy","tag-investors","tag-portfolio","tag-portfolio-rebalancing","tag-risk-management","tag-stocks","tag-the-drawbacks-of-portfolio-rebalancing"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Investment Portfolio Rebalancing - Traders-Paradise<\/title>\n<meta name=\"description\" content=\"Investment portfolio rebalancing is important to keep the assets you own in a sufficient profit. 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