What is Portfolio Rebalancing?
Portfolio rebalancing is a process of resetting the portfolio by buying and selling the stocks in order to balance the weights of each portfolio. Investors can change their portfolios at their convenience. The investors can have a check on the portfolio related to the returns earned from each stock or the risk associated with each stock and then the investor can make efforts to rebalance or change their portfolio.
Explanation
Portfolio rebalancing can be done by the investors to set the weights of the portfolio in order to gain from the stocks. The investors make a suitable portfolio for themselves to earn returns and in the future if the price of the stocks rises or falls then the investors can reset the stocks. Suppose an investor is having an asset mix of Equity and bonds. The total weight of the portfolio is 100%. If the market starts to decline for the bonds then the investor can think of rebalancing its portfolio weights. Suppose the weights are allocated as Equity 40% and Bonds 60% then if the market falls for the bonds then the investor can rebalance the portfolio as Equity 70% and bonds 30%. These are also dependent upon the risk and return associated with the stocks. The investors are free to decide their portfolio weights and can change them at their convenience.
Example of Portfolio Rebalancing
An investor is having their investments in Bonds, Shares, and nifty the weights of the stocks are as follows 10%, 40%, and 50% respectively. The investor checked that the market is giving good returns to the shares and the Nifty is about to fall. Now what he can do is he can rebalance the portfolio as per his preference and market conditions. He is now changing the weights of the portfolio by selling Nifty shares and investing more in shares to get the optimum returns. This is a simple example of portfolio rebalancing.
Costs of Portfolio Rebalancing
Portfolio rebalancing is the rearrangement of the portfolio and it costs money to the investors because the brokers are involved in this and the trading cost is also applicable in case of any changes done. Rebalancing or rearranging the weights of the portfolio can be a bit costly if it is done frequently because the trading expenses are levied.
Portfolio Rebalancing Strategies
Portfolio rebalancing is done to reset the portfolio weights at the time of market fluctuations. A portfolio rebalancing strategy should be made in such a way that the investor can gain maximum profits out of the portfolio. The strategy of portfolio rebalancing will give the investor an opportunity to make changes in the current portfolio strategy. The investors can choose as per their convenience of portfolio stocks. The portfolio rebalancing strategy helps investors to do the planning of their portfolios. The asset allocation in a portfolio is maintained to lower the risk from the market fluctuation and thus this portfolio rebalancing strategy is made in such a way that the investors can gain from the transactions.
Importance of Portfolio Rebalancing
- The portfolio rebalancing prevents the investors from getting exposure to risk.
- It will always help the investors to make changes in their portfolio as per the market demands.
- It can help the investors make an accurate decision regarding the investment.
- The process of portfolio rebalancing will always guide the investors to invest in the correct portfolio that will give the maximum returns.
- The portfolio rebalancing also helps to maintain the asset block of the investors. Investors can change the alignment of the portfolio by buying and selling the stocks as per the changes in the market.
- This is also important so that the investors can enjoy a low risk and can analyze the stock which is giving more returns.
Benefits
- Investors can enjoy the opportunity of changing their portfolios or resetting their portfolios with this method.
- It will help the investors to maintain the asset block and the stocks can be changed at the convenience of the investors and the market.
- The rebalancing will help the investors to fulfill their goals and thus it can help the investors to arrange the portfolio as per the risk associated with the stocks.
- It can help the investors to have risk-controlled investment proceeds.
- The rebalancing can also help in avoiding tax implications such as capital gain tax. The investment can be in such a way that the investors can save taxes by wisely investing in the portfolio and also by resetting it.
- This can also give a comparative analysis of the stocks in the portfolio. The investors can choose from the portfolio which stock is good for them to continue and which stock is not so good.
Disadvantages
- This although is a very efficient method of allocating the portfolio of the investors but has several disadvantages as well.
- The investors will not be encouraged to invest for a longer period of time.
- The investors should also be aware that the rebalancing will incur a certain cost as trading. This can be sometimes very high depending upon the stocks and the brokers involved.
- This can also make an investor worrisome because the stock market will keep on changing and thus the investor will always be exposed to risk. So to reduce that risk the investor will have to reset the portfolio as per their convenience this can bring some sort of problem for the investors.
- The investors are required to gain knowledge before the investment and also they have to be alert while deciding to change the portfolio settings otherwise they have to consult the brokers and then the cost of such change will be a bit high.
Conclusion
Portfolio rebalancing is a process of resting the asset block of the investors. Investors can change the stocks in the portfolio as per their demand. The market condition can also be a guiding factor for the investors to make changes but there are certain disadvantages which are mainly costs associated with it. Therefore all investors should do proper research before the investment or before rebalancing.
Recommended Articles
This is a guide to Portfolio Rebalancing. Here we discuss the definition and portfolio rebalancing strategies along with their benefits and disadvantages. You may also have a look at the following articles to learn more –
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