Will your insurance policies be safe in your e-insurance account?

As an investor, you often hear that how crucial it is to review your portfolio. But even after reviewing, do you rebalance your portfolio? Portfolio rebalancing is a technique for realigning the weights of individual securities in a portfolio to maintain the desired asset allocation and risk profile.

It entails selling a few investments and buying others to grow one’s investment in current securities or to add funds to purchase new assets strategically. In an ideal world, portfolios would be rebalanced regularly, such as once a year or according to the intended asset allocation. Every investor’s portfolio must be rebalanced periodically.

Portfolio rebalancing

Portfolio rebalancing is the process of examining and restoring an investor’s portfolio’s asset allocation to its target level. In other terms, rebalancing is the mechanism by which an asset portfolio is weighted. For instance, an investor may choose to invest 50% in stocks and 50% in bonds at the time of investing.

After a period of time, the equities perform well, and the equity allocation increases to 65%. It is now essential to revert to the original asset allocation. This is because future profits or losses are strongly contingent on the success of the underlying stock. As a result, experts advocate realigning the assets to maintain the proper risk-reward ratio.

Portfolio rebalancing also entails selling underperforming assets and replacing them with new ones that provide more growth potential while preserving the appropriate asset mix. Additionally, it assists in the disposition of investments that are no longer consistent with the investment objectives.

Factors that call for a rebalancing of the portfolio

-An increased inflow of income from the sale of inherited property or your spouse quitting their work has two distinct effects on your willingness to take risks and, consequently, on your asset allocation.

-Risk tolerance decreases with age. The way an individual views a fund evolves over time. Doing annual portfolio reviews may close the gap between your risk tolerance and your exposure to various asset types.

– Asset class performance affects your initial asset allocation. It is also critical to periodically evaluate and rebalance each fund within each asset class.

-Consider a scenario in which you’re saving for your child’s schooling. You intended for your child to complete their undergraduate studies in India. Still, after observing your child’s enthusiasm for their chosen field of study, you decided to send them abroad for higher education. However, have you anticipated this possibility? Your entire computation will be thrown out in such circumstances. What method of payment would you use? This is where conducting a periodic evaluation of your portfolio and objectives might assist in rebalancing.