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The amazing power of rebalancing on the performance of your portfolio

by , 02 July 2014

Rebalancing is a simple strategy of keeping your assets in certain proportions. Periodically, you check these proportions. If any of these assets stray out of their proportion, you ‘rebalance' them. Rebalancing means you can forget about the daily ups and downs in the market. And your portfolio can benefit. Let's take a closer look at the benefits to your portfolio…

How rebalancing can benefit your portfolio performance

To really get an idea why rebalancing is a worthwhile strategy to follow, the best thing to do is have a look at an example.

This example took place from 1 August 2000 to 23 September 2013. In this time period there was a number of wars, recessions, the dot com bubble burst and the financial crisis, to name a few event.

Rebalancing of the portfolios took place annually, Keith Fitz-Gerald in Money Morning US explains.

Over the above time period, if you put a portfolio that was regularly rebalanced against a portfolio that began with a 50/50 split between stocks and bonds (and not rebalanced) against each other, how did they perform?

For the period, the rebalanced portfolio made a total return pf 292.16%. The non-rebalanced portfolio made 44.09%.

This shows the clear benefits of rebalancing your portfolio.

How to rebalance your portfolio

When it comes to rebalancing your own portfolio, you have a number of options open to you. Over the years, researchers have investigated the strategy.

Some of these studies look at rebalancing depending on volatility, market conditions, the percentage moves of asset classes and tax. But many of these methods make rebalancing complex.

Opting for a simple way is a much easier way to do it. So pick a day of the year to conduct your portfolio rebalancing. It could form one of your New Year resolutions or you could do it just after your birthday.

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And if you don’t want to do all the hard work yourself, check out one of the free rebalancing calculators available online.

And if you really want to boost your returns, try and add some money into your investment pot every year when you do your rebalancing.

So there you have it, the amazing power of rebalancing on your portfolio performance.

The amazing power of rebalancing on the performance of your portfolio
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