The value of risk-based rebalancing
This technique helps mitigate losses by changing portfolio allocations in response to a sustained increase in market risk.
Add BT as a preferred sourceTHE stock market changes quickly. No investor wants to experience losses in a market correction or be left out when the market is up - which is why rebalancing your portfolio is so important.
Rebalancing is a crucial component of any successful investment strategy. It entails periodically buying or selling assets in a portfolio to maintain a desired asset allocation and portfolio risk level.
As markets move, shifts in portfolio asset allocation are to be expected. An investor may have decided that a portfolio of 60 per cent equities and 40 per cent fixed income fits his risk tolerance. But, after months of market exuberance, the portfolio could have shifted to a 70 per cent equities and 30 per cent fixed income allocation as equities grew more in value compared to fixed income. This change exposes the portfolio to risk and return levels that do not match the investor's risk tolerance. To prevent this, conventional wisdom dictates that the portfolio should be rebalanced back to its original 60 per cent equities and 40 per cent fixed income allocation.
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