When and Why to Rebalance Your Investment Portfolio

Re-balance is a common investment phrase, but one with many meanings, many interpretations. The real questions are:

  • What is ‘re-balance’ in relationship to safe investing?
  • What is ‘re-balance’ in relationship to profitable investing?
  • When should you re-balance
  • What are the advantages of re-balancing
  • What are the disadvantages of re-balancing

Re-balance, in its simplest explanation is selling your stocks, mutual funds or ETFs and buying new positions as if you were starting all over in the stock market.

Safe Investing and Re-balancing:

Re-balance in relationship to safe investing means that you are going to sell all or most of your positions at a specific point in time and pick new investments that offer less risk than your present holdings.

Profitable Investing and Re-balancing:

Re-balance in relationship to profitable investing means you are going to sell all or most of your positions at a specific point in time and pick new investments that offer more potential for profits, for greater gains than your present positions.

When to re-balance:

When you should re-balance your portfolio depends upon your investment philosophy. Some investment advisors advocate quarterly re-balancing while others suggest it is only necessary to re-balance once a year. An investment program may offer you the opportunity to set up automatic re-balancing at pre-determined times like quarterly, half-year and yearly, perhaps even monthly.

Advantages of Re-balancing:

The advantages of re-balancing include:

  • Poor performing positions are eliminated
  • Positions with greater potential, either for minimal risk or greater profit are purchased
  • You can balance out the value of your positions equally so your diversification level remains constant and equal

Disadvantages of Re-balancing:

The disadvantages of re-balancing include:

  • You could sell a highly profitable position that is still growing
  • Your trading expense may grow needlessly
  • Automatic re-balancing at specific times may turn out to be the wrong time to sell

So Re-balance or Not – that is still the question.

My suggestion considers two critical factors.

  1. If you are using an investment tool, an investment software program, for safe investing that gives you buy-sell recommendations based on performance or relative strength of your positions and potential positions, then re-balance should not be necessary or rarely necessary.
  2. It is not a bad idea to take a look at your portfolio, your individual strategies and positions one a year, perhaps once every six months to see if your chosen strategies are doing better or worse than your ‘watch’ strategies. In other words perhaps your ‘re-balance’ should be to switch strategies and positions.

The objective in safe investing, particularly if you are using investing software, is to achieve gains with minimal risk, minimal loss, so re-balancing your portfolio can be good but automatic re-balancing should be considered very carefully.

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