Introduction

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Portfolio rebalancing is the process of adjusting the asset allocation of a portfolio to bring it back to its desired target allocation. It involves buying or selling assets within the portfolio to ensure that the current allocation aligns with the investor's long-term investment strategy and risk tolerance.

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Key Points

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Here are some key points about portfolio rebalancing:

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1. Asset Allocation: Asset allocation refers to the distribution of investments across different asset classes, such as stocks, bonds, cash, and other investment categories. A portfolio's target asset allocation is determined based on the investor's goals, risk tolerance, and investment strategy. Over time, due to market fluctuations, the actual allocation of the portfolio may deviate from the target allocation.
2. Rebalancing Trigger: Rebalancing is typically triggered when the actual allocation of the portfolio deviates significantly from the target allocation. This deviation can occur due to changes in market values, varying returns of different asset classes, or changes in the investor's risk profile or investment objectives.
3. Selling and Buying: Rebalancing involves selling assets that have become overweighted in the portfolio and buying assets that have become underweighted. This is done to bring the portfolio back to its desired asset allocation. The specific assets to be sold or bought depend on the investor's target allocation and the current holdings within the portfolio.
4. Frequency of Rebalancing: The frequency of portfolio rebalancing can vary depending on the investor's preference and investment strategy. Some investors rebalance on a regular schedule, such as annually, semi-annually, or quarterly. Others rebalance when the portfolio's allocation deviates beyond a certain predetermined threshold.
5. Benefits of Rebalancing: Rebalancing helps maintain the desired risk profile of a portfolio and can prevent it from becoming overly concentrated in certain asset classes that have performed well in the short term. It helps investors adhere to their long-term investment strategy, reduce portfolio volatility, and potentially capture opportunities to buy assets that have become undervalued.
6. Considerations: When rebalancing, investors should consider transaction costs, tax implications, and the impact of market conditions. It is important to evaluate the potential benefits of rebalancing against the costs and consider the investor's overall financial situation and investment objectives.
7. Professional Advice: Rebalancing decisions can be complex, especially for investors with large and diverse portfolios. Seeking professional advice from financial advisors or portfolio managers can help investors make informed decisions based on their specific circumstances and goals.

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In Summary

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Portfolio rebalancing is an ongoing process that ensures the alignment of the portfolio with the investor's long-term investment strategy. It helps manage risk, maintain discipline, and potentially improve long-term returns. Regular monitoring and periodic adjustments of the portfolio's asset allocation can contribute to a well-managed investment portfolio.

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We've built a number of portfolio allocation tools on the Strabo dashboard to allow you to both track your asset allocation, and manage the rebalancing of your assets to reflect your tolerance and appetite for risk. This is one of the largest challenges new investors face when building an investment portfolio.

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