When it comes to investment, many issues must be strategically thought out so that there are no losses. Asset allocation is one of those important points that investors need to assess in order to achieve the desired standard.
Do you know what is rebalancing of the investment portfolio? Have you ever been able to identify the need to do so? In this article, we show that this process is not a seven-headed bug and brought up the main topics on the subject, such as:
- What is portfolio rebalancing ?;
- When should it be done ?;
- Like is the rebalancing done ?;
- Which the importance of rebalancing for my investments ?;
- What happens if I don’t rebalance my Wallet?
Now, if you are still a beginner in the subject of investments and want to know which are the best types and how to start this journey, we recommend reading this first. article here. It will be essential for the continuation of today’s post!
What is rebalancing of the investment portfolio?
Portfolio rebalancing is, in general, the practice of adjusting the proportion of assets present in a given portfolio so that it is in line with the investor’s strategy.
This process must be done according to the investor profile and, therefore, it is necessary to take into account the proposed strategies and goals. Normally, the possible profitability of each application, the risks involved and their volatility are considered.
The purpose of portfolio rebalancing is always to maintain a balance between the risks and return on investments made. It is super important for any investor profile, as it is very difficult to predict market conditions in the long run. Therefore, a periodic reassessment is indispensable!
Different market situations can cause the interest on investments to vary from day to day, such as government reforms for example. This can make some applications more or less attractive. This means that investors need to reevaluate their latest stocks.
When to rebalance the portfolio?
It is desirable to carry out the rebalancing of the asset portfolio every time the market oscillates. However, the costs of an asset transaction can so often make this practice difficult.
So when to rebalance my investment portfolio? Typically, the most cost-effective way to perform this practice is through “rebalancing by period” methodology. It is focused on reducing costs so that the profitability of the process can be maintained.
When rebalancing by period, the operation is always carried out at previously defined moments, regardless of the fluctuations of the assets. It can be done monthly or even every six months or annually.
The problem is that in this methodology, the investor can miss important moments that happen between one rebalancing and another.
So there is another methodology for determining when to do the portfolio rebalancing strategy which is called “By tracks”. In this situation, limits are set for the fluctuation of the percentage of assets.
Thus, instead of the investor determining which periods to carry out the rebalancing, a tolerance limit is analyzed. Thus, the process is done when the interval is exceeded.
For example, you can stipulate that the investment may fluctuate only 20% more or less. Thus, if the desired percentage is 50% of the shares, the acceptable limit will be between 40% and 60%.
How to rebalance the portfolio?
Now it’s time to understand how this process is done. Rebalancing consists of giving up one asset to acquire another to obtain balance and try to achieve the ideal investment portfolio.
Therefore, in order to do this, it is necessary to observe the proportion in which the portfolio is in order to be able to buy or sell assets and, thus, ensure that it returns to its original state.
The investor must carefully observe the costs before carrying out any operation in order not to exceed the profitability obtained. Otherwise, the adjustment will not make sense.
Therefore, you need to adjust your portfolio so that it meets your security and profitability needs, combining a guaranteed return with your investment strategies.
In addition, it is important to study as much as possible to understand what are the best times to buy and sell your shares. Only then will it be possible to avoid unnecessary risks.
How important is rebalancing for my investments?
As you can see, portfolio rebalancing works just like a balance that balances the composition of your investments according to your strategies.
Therefore, it can offer several benefits to investors. Check out the main ones:
Follow the investor profile
One of the main importance of portfolio rebalancing is to follow the investor’s profile.
In order to define what percentage will be allocated to each asset class, we always take into account the investor’s strategies. Therefore, this practice will always serve to maintain this balance, which will allow the risk level to always be in accordance with the defined strategies.
Minimize long-term risks
Another important point is that rebalancing reduces long-term risks. This happens because, as time goes by, investors tend to increase their variable income assets, which are more risky and hostage to fluctuations.
Although they tend to have a higher return than fixed income, the risks are also greater. Therefore, through rebalancing, it is possible to sell your variable income assets after a good increase in the stock market and invest in fixed income to reduce risks if there is a strong movement in the variable income market.
The rebalancing of the portfolio will help to determine the best moments to put this strategy into practice, thus reducing risks and, at the same time, taking advantage of market opportunities.
Sell high and buy low
By rebalancing your portfolio, you will be prepared to sell those assets that are overvalued and invest more in those that have not had such a positive return.
It is enough for the investor to follow the evolution of his portfolio to determine when to buy and sell to keep it balanced.
What happens if I don’t rebalance my wallet?
In the previous topic, you saw that performing portfolio rebalancing allows investors to take advantage of market opportunities, reduce their risks and align their strategies with their objectives. Therefore, not carrying out this process can bring risks.
By not rebalancing your portfolio, you are leaving your assets at the mercy of market fluctuations. In this way, the risks become greater and the return over the years will fall.
Therefore, for those who do not want or do not have time to rebalance the portfolio, it is important to know that this process does not need to be performed manually.
Rebalancing is a simple process, but it requires discipline to monitor the results of your portfolio. Therefore, if you are not comfortable doing this management alone, it is possible to look for solutions that perform the rebalancing automatically.
Getting to an ideal investment portfolio is an arduous process and requires a lot of analysis. Not to mention that the investment decision is very personal and will depend on the profile of each one.
When rebalancing the portfolio, it is possible to approach this ideal, as this process is crucial for investors to better define their strategies and, subsequently, follow them faithfully.
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