At times, your portfolio might need rebalancing to stick to the investment strategy you’ve set or to adapt to a revised investment plan. But figuring out how often to rebalance your portfolio can be puzzling. In this blog, let us understand the ideal frequency for portfolio rebalancing.
What Frequency Is Ideal for Rebalancing Your Investment Portfolio?
The frequency of rebalancing a portfolio varies based on the investor’s strategy and preferences. Let’s consider two examples:
Strategy 1
Investor A maintains a conservative portfolio with 60% in fixed deposits and 40% in equities.
Rebalancing Frequency: Preferring stability, they might choose to rebalance annually or biannually. They believe that infrequent adjustments align with their long-term financial objectives without reacting to short-term market fluctuations.
Strategy 2
Investor B allocates 90% to equities and 10% to bonds.
Rebalancing Frequency: Given the higher exposure to market volatility, this investor may opt for more frequent rebalancing, possibly every quarter or biannually. They aim to capitalize on market shifts and maintain their preferred asset allocation for maximum growth potential.
When’s the Ideal Moment for Portfolio Rebalancing?
There are three triggers available to guide investors in portfolio rebalancing:
Time Trigger
This trigger revolves around setting specific intervals or schedules for portfolio rebalancing. Investors decide on a routine—whether it’s monthly, quarterly, or annually—to reassess their investments. For instance, if you choose a quarterly schedule, every three months you’d review your portfolio and make adjustments to align it with your original investment plan.
Threshold Trigger
With this trigger, investors establish predetermined thresholds or limits for asset allocation. When the portfolio’s actual allocation deviates from the target by a specified percentage (like 5%, 10%, or 20%), the trigger activates. For instance, if your target allocation for stocks is 50%, and they exceed 55%, the threshold trigger signals that it’s time to rebalance by selling some stocks to maintain the desired allocation.
Combination Trigger
This trigger combines elements of both the time-based and threshold triggers. It integrates scheduled intervals with predetermined percentage thresholds. This approach ensures a dynamic strategy, prompting rebalancing either at predefined time intervals or whenever the portfolio drifts beyond predetermined allocation thresholds. It offers a balanced, proactive method to manage portfolio stability.
Conclusion
Portfolio rebalancing is essential to ensure that your portfolio is suitable for your investment goals. It lets you control risk and make adjustments in line with your changing investing strategy. The optimal frequency of portfolio rebalancing is determined by how much time you are willing to commit to managing your investments.
FAQs
- What if I don’t rebalance my portfolio?
Without rebalancing, your portfolio might become overexposed to certain assets, potentially increasing risk if market conditions change unfavourably.
- What triggers the need for portfolio rebalancing?
Any significant change in asset values that causes your portfolio’s allocation to deviate significantly from your target allocation can trigger the need for rebalancing.
- What if I rebalance and the market continues to move against my adjustments?
Market movements are unpredictable. Rebalancing is about aligning your portfolio with your long-term strategy, not timing the market.