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Rebalancing is a strategy used to maintain an investment portfolio’s desired asset allocation. It involves adjusting the proportions of different assets to stay aligned with your financial goals and risk tolerance. Regular rebalancing can help manage risk and improve long-term returns.
Understanding Portfolio Rebalancing
Portfolio rebalancing ensures that your investment mix remains consistent over time. As markets fluctuate, the value of assets changes, which can cause your portfolio to drift from its original allocation. Rebalancing involves selling some assets and buying others to restore the target distribution.
When to Rebalance
Rebalancing can be done periodically, such as quarterly or annually, or when asset allocations deviate by a certain percentage from the target. The timing depends on your investment strategy and market conditions. Regular reviews help keep your portfolio aligned with your goals.
Steps to Rebalance Your Portfolio
Follow these steps to rebalance effectively:
- Assess your current asset allocation.
- Compare it with your target allocation.
- Identify assets that are over or underweighted.
- Sell assets that are overrepresented.
- Buy assets that are underrepresented.