Monitoring and Rebalancing Your Portfolio
In order to maintain a well-diversified portfolio and achieve longer-term financial objectives, continually monitoring and rebalancing your portfolio is essential. This chapter will explore the importance of regular portfolio management and discuss strategies for maintaining a balanced portfolio that manages risk.
Importance of Monitoring and Rebalancing
Balanced Portfolio: Over time, the performance of different asset classes can cause a portfolio to drift away from its original asset allocation. Ongoing monitoring and rebalancing of your holdings can help to maintain a balanced portfolio, ensuring it remains aligned with your risk tolerance and return targets.
Managing Risk: Rebalancing helps to manage risk by adjusting portfolio exposure to underlying asset classes in line with performance, helping to maintain a consistent risk profile and avoid overexposure to any single asset class.
Optimising Returns: Regular monitoring and allocation adjusting can help to optimise returns by ensuring that a portfolio remains diversified and aligned with your overarching investment strategy.
Strategies for Monitoring and Rebalancing
There are several strategies that you can use to monitor and rebalance your portfolio:
Regular Reviews: It is important to review your investment portfolio at least once a year to ensure that it remains aligned with your specific financial goals and risk profile.
Threshold-Based Rebalancing: Another approach for portfolio management is setting a threshold, such as a 5% deviation from the target asset allocation, to trigger an automatic rebalancing.
Tax-Efficient Rebalancing: You should consider the tax implications of rebalancing and use strategies such as tax-loss harvesting to minimise tax liabilities during this review process.
Dollar-Cost Averaging: You can use dollar-cost averaging, which involves investing a fixed amount of money at regular intervals, to help rebalance your portfolio and reduce the impact of market price volatility when rebalancing.
Implementing Monitoring and Rebalancing
Performing regular portfolio rebalancing requires careful planning and ongoing management:
Track Asset Allocation: It can be helpful to use spreadsheets or investment monitoring software to track your portfolio's asset allocation and be notified when your allocation deviates from the target.
Analyse Performance: You should analyse your portfolio's performance, comparing actual returns to target returns and identifying deviations from the target asset allocation.
Asset Balancing: To maintain a balanced portfolio, you should sell overweight assets to reduce exposure and buy underweight assets to increase exposure, helping to bring the portfolio back into target alignment.
Conclusion
By understanding the importance of monitoring, rebalancing, and implementing strategies to maintain a balanced portfolio, you can maintain a well-diversified portfolio and further optimise your investment outcomes. In the next chapter we will explore advanced investing concepts, discussing derivatives, leveraged and inverse ETFs, and hedge funds.