Rebalancing your investment portfolio is an essential part of maintaining and growing your wealth over time. It’s a process that involves buying and selling securities to bring your asset allocation back in line with your investment goals and risk tolerance. While rebalancing can be done by financial advisors, it can also be done by individuals who want more control over their investments.
In this post, we’ll discuss some DIY rebalancing strategies that you can use to keep your portfolio on track.
1. Set a target asset allocation
The first step in any rebalancing strategy is to set a target asset allocation. This means deciding how much of your portfolio should be invested in each type of security, such as stocks, bonds, and cash. Your target asset allocation should reflect your investment goals and risk tolerance.
For example, if you’re young and have a long-term investment horizon, you may want to invest more heavily in stocks than bonds or cash because stocks historically offer higher returns over the long term but are also more volatile than bonds or cash. On the other hand, if you’re close to retirement or have a lower risk tolerance, you may want to invest more heavily in bonds or cash than stocks.
Once you’ve determined your target asset allocation, monitor it regularly so that you know when it’s time to rebalance.
2. Evaluate current holdings
Before making any changes to your portfolio, evaluate your current holdings’ performance relative to their respective benchmarks and sectors’ overall performance. Keep an eye out for underperforming assets; these assets will need adjustments during the rebalancing process.
It’s important not only to look at individual securities but also at entire sectors within those assets classes (for example: technology versus healthcare). If one sector has performed better than another recently (say tech), then its weight in the portfolio may have increased beyond what was intended initially when creating the plan based on diversification principles alone – which could lead to unintended exposures and a less diversified portfolio.
3. Sell overperforming assets
When rebalancing, selling your overperforming assets is an excellent way to lock in gains and bring your portfolio back into line with your target asset allocation. This may involve selling some shares of stocks that have performed well, even though they were initially intended for long-term holding periods.
Keep in mind that capital gains taxes may apply when you sell securities at a profit. So, it’s essential to consider the tax implications before making any moves.
4. Buy underperforming assets
On the other hand, buying underperforming assets can be an opportunity to add undervalued securities to your portfolio while bringing it back in line with your target asset allocation. These investments will have lower prices than their peers or benchmarks due to market forces such as sector rotation or global economic shifts.
5. Avoid emotional reactions
It’s crucial not to let emotions drive investment decisions during the rebalancing process. You should avoid chasing returns by investing heavily in recent out-performers and ditching losers after disappointing results – which could lead you down paths of poor diversification practices and missed opportunities for future growth potentials.
6. Automate where possible
Automating certain aspects of rebalancing can help streamline the process while reducing errors caused by manual adjustments’ human error potentialities – thereby also saving time for more important tasks like researching new investment opportunities or analyzing current holdings’ performance metrics against benchmarks regularly.
For example, if you use exchange-traded funds (ETFs) or mutual funds as part of your portfolio strategy, they typically offer automatic reinvestment options based on set criteria like dividends distributions and other factors that would trigger buy/sell orders automatically based on pre-set formulas that correspond with an investor’s desired goals/strategies.
7. Re-evaluate periodically
The most successful DIY investors are always reviewing their portfolios’ performance metrics regularly and adjusting them accordingly. You should consider re-evaluating your target asset allocation and rebalancing strategy at least annually – if not more frequently, depending on personal circumstances or market conditions.
Regular portfolio reviews will help you identify any changes in the markets or sectors that could influence your investment decisions – as well as new opportunities emerging within certain niches (such as technology startups or renewable energy companies).
Conclusion
Rebalancing is an essential part of managing any investment portfolio for long-term success. By following a few simple DIY strategies, you can keep your investments aligned with your goals and risk tolerance while minimizing emotional reactions to market fluctuations. Remember always to re-evaluate periodically and seek advice from financial professionals when necessary.