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How rebalancing can benefit your investment portfolio

by , 12 September 2014

When it comes to successful investing, you need to have a plan on how you're going to stay in the markets.

To do this effectively, one of the best ways to do it is to have a structured portfolio and regularly rebalance it.

Let's take a closer look at how this works and how it benefits your portfolio…

How to structure your investment portfolio

There are a number of ways you can structure your investment portfolio.

Here’s an example of how you could do it…

You could follow at 50-40-10 model. That is:

  • Have 50% of your assets in safer investments. These include bonds and bond unit trusts.
  • Have 40% of your assets in growth and income stocks. This includes solid companies that pay good dividends.
  • Have 10% of your assets in more speculative investments, such as penny shares and other small-cap stocks.

By following a portfolio model like this, you can minimise your risk. And rebalancing your portfolio is essential to maintaining this model, Sid Riggs in Money Morning US explains…

Rebalancing your portfolio

If you use a predetermined exit strategy, which means you cash in profitable positions and sell losers, you’ll find yourself with cash to spare.

When this happens, you need to look at the different allocations of your investment portfolio. (You should schedule time to do this on a regular basis, such as every six or 12 months.)

If you want to maintain a 50-40-10 model, as above, you need to work out which parts of your portfolio are underweight and which are overweight.

You would then invest your money into the portion of your portfolio which is underweight. You would sell some of your holdings in the portions of your portfolio which are overweight.

The great thing about rebalancing is it takes the guesswork of investing out of the equation. It forces you to sell assets that have risen in value and buy assets that have fallen in value.

And by sticking to that you’re following one of the golden rules of investing: Buy low and sell high.

So there you have it, how rebalancing can benefit your portfolio.

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How rebalancing can benefit your investment portfolio
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