When should I rebalance my portfolio?
Once you have built a well-diversified portfolio, you may need to rebalance it periodically to ensure it continues to match your investment goals and lifestyle objectives.
Rebalancing involves buying or selling investments to ensure that the original asset allocation of your portfolio remains steady.
There are a number of reasons why you might choose to rebalance your portfolio:
- Your risk tolerance or goals have changed
- You are considering selling and buying new investments
- To re-weight your asset allocation
- The relative weight of your portfolio in an asset class has changed according to its performance
When you first construct your portfolio, your investments goals, strategy and risk tolerance are factored in but this may change over time and your portfolio should be rebalanced to reflect any changes.
Why should you rebalance?
Over time your portfolio will change because you will end up having a higher percentage in your portfolio of asset classes that have outperformed.
Rebalancing your portfolio, by going back to your original asset allocation will help you take advantage of the outperformance.
You should consider readjusting the weightings within your portfolio to make sure you're not more exposed to a certain holding or asset class than you want to be.
How often should you rebalance?
General consensus is that a well-diversified portfolio may need rebalancing every 12 months, especially if you are in an accumulation phase.
If you are in retirement or getting ready for retirement, a de-accumulation phase, your portfolio may need to be rebalanced more often because of a lower risk tolerance.
Rebalancing your portfolio too often may incur unnecessary fees, commissions and possibly tax.
Rebalancing at the end of the financial year could be a good time so that you can also factor in any tax strategies available.
Monitor regularly
You may not need to rebalance your portfolio every year, but monitoring it will mean you are ready to make changes when needed.
Regularly assessing what the market is doing and understanding how it is impacting your portfolio is a key factor in remaining on target to achieve your investment goals.