Portfolio Rebalancing: Keep Your Risk Under Control
💡 Quick Tip
Investing is not "buy and forget." Over time, some assets grow more than others, altering your original risk level. Rebalancing is the professional technique to bring balance back to your portfolio, selling what has gone up and buying what has gone down.
Why Does Your Investment Get Unbalanced?
Imagine you design a portfolio with 50% stocks (higher risk) and 50% bonds (lower risk). After a great year in the stock market, your stocks are worth much more and now represent 70% of your portfolio. Without realizing it, your investment is now much riskier than originally planned.
The Rebalancing Process
Rebalancing consists of selling part of the assets that have gained weight and using that money to buy those that have lost weight. Although it seems counterintuitive to sell what is doing well, it is the best way to buy low and sell high systematically.
- Set a Frequency: You can do it once a year or every six months.
- Set Deviation Bands: For example, if an asset deviates more than 5% from its target weight, it's time to act.
Long-Term Benefits
Rebalancing doesn't always increase final returns, but its main function is risk control. It prevents you from getting carried away by euphoria when the market rises or panicking when it falls. It forces discipline and adherence to your original plan.
📊 Practical Example
You have a $10,000 portfolio divided into $6,000 in stocks and $4,000 in fixed income (60/40). After a year, stocks rise by 20% (worth $7,200) and fixed income stays the same ($4,000). You now have $11,200, but your ratio is 64/36. To rebalance, you sell $480 in stocks and buy $480 in fixed income. Thus, you return to exactly 60% in stocks ($6,720) and 40% in fixed income ($4,480). You have "collected" profits from the rise and reinforced your safety cushion.
