Questions answered: Why should you rebalance your portfolio? When is the best time to rebalance? What are your rebalancing options?
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Key Takeaways:
- Why do we rebalance?
- Rebalancing helps keep the risk parameters of our portfolios in place.
- It can increase return potential.
- Rebalancing is taking from the investment in the asset class that’s gone up in value to buy an asset class that’s gone down.
- How to rebalance:
- A calendar rebalance.
- Rebalance once a year.
- Some of the challenges:
- If the investments haven’t drifted enough, you may not need to rebalance.
- If you rebalance based on a percentage of your portfolio rather than a calendar date, it’s more effective in a rapid change.
- Threshold rebalancing.
- You rebalance based upon how far your portfolio has shifted from its target allocation.
- Software can do this well and automatically trigger a rebalance.
- Constant proportion portfolio insurance.
- Risk account.
- Leveraged with future holdings in order to protect from the downside of equity or stock exposure.
- Safety account.
- This is a cushion value.
- You want to make sure this never drops below a certain value.
- The cushion amount is the amount you need to protect. The remaining amount is the amount you need to grow.
- The allocation of stocks to bonds doesn’t stay the same.
- Risk account.
- A calendar rebalance.
- You don’t want to rebalance too frequently.
- Research shows it’s most effective between 10-15%.
- With calendar rebalancing and threshold rebalancing, you’re constantly coming back to a specific allocation.
- With the third approach, the goal of rebalancing isn’t a specific allocation.
- The goal is to have a fixed amount in your cushion fund and a dynamic allocation of stocks based upon the value of the portfolio.
- With the third approach, the goal of rebalancing isn’t a specific allocation.
Episode Timeline:
[00:56] Why do we rebalance?
[04:36] How to rebalance.
[15:00] How frequently do you rebalance?
[17:13] There is another option.
[23:24] What’s the difference between the three options?
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