Blog Invest How to Find the Best Portfolio Rebalancing Strategies for You

How to Find the Best Portfolio Rebalancing Strategies for You

date October 1, 2021 time 5 min read 1219 views

If you’ve set up an investment portfolio, you’ve done something right, and you’re already ahead of the pack. But you’re not done yet. There’s still something you need to consider:

How will you ensure your investment allocation remains suitable for your goals and preferences?

That requires portfolio rebalancing strategies, so let’s take a look at how to get started.

If you start investing for retirement, smart investments in your 20s, and don’t intend to withdraw the money until your sixties, you can’t expect market conditions to remain constant the whole time. Some asset classes will see their performance improve while others will experience the opposite; leave your portfolio untouched and you could end up with an unbalanced portfolio, leaving you more at risk of volatility. What’s the solution? Implementing portfolio rebalancing strategies along the way.

It might sound appealing to leave your money sitting in an account so you never have to think about it again, but monitoring and checking your portfolio regularly will protect your investment and help you avoid any nasty surprises.

Have you ever felt like there’s a little voice deep inside screaming at you to stop spending money or to sell that stock at a loss when its value is declining? One possible explanation for that could be your enneagram core motivations. Don’t worry if you think this seems too complex or daunting—we’ll talk you through every step of the way.

Sound investment is all about finding the right balance.
Sound investment is all about finding the right balance. (Source: Pixabay)

Investment portfolio rebalancing strategies: the how and why

What’s the difference between intelligent and foolish investors? The uninformed allocate their investments almost at random without a genuine understanding of the risk they’re taking on, while their informed counterparts partake in proper portfolio management

Yet even after you set up the perfect portfolio, you’ll still need to adapt it over time. 

Essentially, rebalancing comes down to changing the distribution of various assets in your portfolio. For instance, you might have initially wanted a high-risk, volatile asset like bitcoin to represent just 5% of your portfolio, leaving the other 95% to safer options like stocks and bonds. But if bitcoin’s value skyrockets relative to everything else, it could be worth 20% of the portfolio a few years down the line—a percentage that might make you uncomfortable.

Or maybe you want a low-risk portfolio so you can retire soon, but one asset experiences unprecedented volatility. Again, rebalancing is an opportunity to reassess whether an investment is still suitable for you.

How rebalancing works

Rebalancing a portfolio simply involves selling some assets and buying more of other assets—or perhaps purchasing new assets. It’s not about changing your investment strategy (e.g., deciding you’re willing to take on more risk); it’s about making sure your always-shifting asset allocations don’t change it for you.

Bear in mind that the rebalancing process may involve taxes, depending on the investment type and profits made—although there are ways to avoid or minimize the costs. This is one reason why professional insight can be helpful, especially for higher net worth individuals.

Finally, there’s no universal rule about how often you should “check in” and reassess your portfolio—this will depend on your investing horizon, personal preferences, tax and transaction costs, and risk tolerance, among other factors. In fact, frequency is one of the core components of different strategies, which we’ll examine in greater detail later.

Why rebalancing your portfolio matters

We can sum up why the rebalancing process is vital in a few words: just because something worked or made sense yesterday, it doesn’t mean it will still work or make sense today.

Financial markets are brutal and constantly changing—even the most talented investor can’t predict what will be happening a few years down the line. Considering most people aim to invest over the course of their lifetime, the costs of not rebalancing are high. The world looked very different back in the 1990s, never mind the 1980s or 1970s. Entire industries have been destroyed and born, and new financial products created.

If you’re thinking this all sounds rather complex, you’re not wrong—the intricacies of portfolio management is one reason that many people would prefer to work with an institutional investor rather than handling everything themselves. Still, that doesn’t mean that it’s impossible by any means.

The best portfolio rebalancing strategies find ways to buy and sell assets as markets change to honor the investor’s preferences.
The best portfolio rebalancing strategies find ways to buy and sell assets as markets change to honor the investor’s preferences. (Source: Pixabay)

What are the best portfolio rebalancing strategies?

The most basic step of rebalancing your portfolio is to record the cost of each individual asset and the total portfolio cost from the beginning, which gives you a baseline to make comparisons from when the costs and allocations change. Then, you can make adjustments to achieve the distribution of assets and risk you want, and start compound interest investments.

Beyond that, there’s a fair amount of variation, but here are some of the most popular approaches.

Time-based rebalancing

As we’ve touched on already, the frequency at which you should rebalance your portfolio comes down to various factors, including your risk preferences and taxation considerations. A yearly rebalancing is ideal for most people, though others might be willing to stretch this to two years or even rebalance every quarter. 

Once you’ve decided your frequency, you’ve already done a large part of the legwork required for time-based rebalancing. This strategy simply involves periodically checking your portfolio and rebalancing it to achieve the allocation you want. For example, you might decide that on 1 December every year, you’ll make the tweaks needed to ensure your portfolio is still made up of 10% bonds and 90% stocks.

The best portfolio rebalancing strategies vary between individuals, but time-based rebalancing is a simple yet effective option.
The best portfolio rebalancing strategies vary between individuals, but time-based rebalancing is a simple yet effective option. (Source: Pixabay)

Tolerance-based rebalancing

If you only rebalance your portfolio occasionally, you risk of letting it get highly unbalanced. Tolerance-based rebalancing overcomes this limitation by telling you to make tweaks whenever your portfolio becomes unbalanced to a degree you’re uncomfortable with.

So, if you don’t want to deviate more than 10% from your initial allocation, you’d rebalance as soon as a deviation of that size takes place.

This makes it necessary to monitor your portfolio more often, but it’s worth it if you want to err on the side of caution.

Constant-proportion rebalancing

The most advanced rebalancing strategy of the three featured here is to account for the size of your portfolio. In this approach, there’s an assumption that greater wealth makes an investor more willing to take risks—so, as the portfolio size rises, it shifts toward riskier assets (and vice versa).

You may have found yourself scratching your head in despair and wondering how to turn $1,000 into $5,000 in a month. Depending on your preferences, you could make the adjustments on a regular basis or monitor the portfolio constantly.

Investing with MyConstant

When it’s time for you to rebalance your portfolio, you may be looking to sell some of your existing assets and buy more low-risk or high-risk investments. At MyConstant, we offer both.

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George Schooling

George Schooling

Borrow against your multi-crypto portfolio in minutes from just 6% APR

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