The best way to rebalance your portfolio and reap the benefits
When you first invest, you should decide on what asset allocation you're going to stick to. For example, what percentage of your portfolio you'll hold in stocks and what percentage you'll hold in bonds.
Over time, the asset allocation of your portfolio will change as their underlying values rise and fall. So every now and then you need to rebalance your portfolio.
But what's the best way to rebalance? After all it costs to rebalance your portfolio.
Read on to uncover the best way to do it…
Three ways to rebalance your portfolio
There are essentially three ways to rebalance your portfolio:
Time rebalancing: You do this at set intervals, for example, every month, quarter or year.
Threshold rebalancing: You only rebalance your portfolio when the weight of one or more assets exceeds your target by a set amount, say 5% or 10%.
Time and threshold rebalancing: You stick to a fixed rebalancing schedule, but if moves in your asset allocation aren’t big enough, you don’t do anything.
There are pros and cons to each of these, Cris Sholto Heaton in Money Week
explains. If you rebalance too often, you’ll incur high costs with your stockbroker and you may trigger tax.
There’s also evidence to suggest that rebalancing less frequently takes advantage of short-term trends in the market helping to boost your returns.
Boosting your returns isn’t at the forefront of rebalancing your portfolio. Rebalancing helps to reduce your investment risk. But no investor is going to refuse higher gains.
The optimum way to rebalance your portfolio
If you take into account costs and the returns aspect of your portfolio, the best rebalancing strategy to follow is time and threshold rebalancing.
A good rule of thumb is review your portfolio annually and only rebalance assets that have moved more than 5% out of your target asset allocation.
You should also coincide rebalancing with other activities in your portfolio to help keep costs down. For instance, if you’re reinvesting dividends to buy more shares. This might be enough to rebalance your portfolio without doing anything else.
So there you have it. The best way to rebalance your portfolio and reap the benefits.
*********** Advertisement ************
Discover the ONLY way to make LIFE-CHANGING amounts of money on the stock market...
You could be banking some serious profits within a few months... even weeks... (and sometimes even overnight!)
All thanks to the explosive profit potential of a specific class of wealth-creating companies that your friends and neighbours will most probably know nothing about.
But today you can discover everything you need to know to start making gains as big as 200%, 300% and even 500% from these often neglected shares.
Click here to find out more.