Portfolio Rebalancing: Here's How to Do It Right

Balance is an essential part of a healthy life. If we lose balance in our diet, it leads to health problems. When we lose balance in our financial portfolio, it can mean unhealthy finances and unnecessary stress. Rebalancing your portfolio is a great way to bring order back into your finances and give yourself the feeling of more control.

What is rebalancing?

Rebalancing is the act of periodically buying or selling assets within your investment portfolio to keep it within your desired risk level or asset allocation. Rebalancing is more about managing risk than it is about improving returns.

Let’s look at an example. Say you’re the kind of person who likes to play it safe. You have your portfolio with 50% bonds, 10% Canadian stocks, 10% international stocks, 10% US stocks, and 20% in alternative investments. If the US stock market performs well over the years, these percentages change. Your portfolio starts to have closer to 40% bonds, making your overall portfolio riskier as it has less fixed income than in the beginning. This is why we rebalance our portfolios.

Now that you know what rebalancing is, you may be wondering when you need to rebalance your portfolio. This will depend on your risk level, investment strategy, and personal knowledge and schedule.

How often should you be rebalancing your portfolio?

How often you rebalance your portfolio will depend on your risk level and how much time and energy you plan on putting into your investment portfolio. These are considerations that you need to take into account at the very beginning, when you initially start investing as well. There are a few different kinds of rebalancing:

Periodic Rebalancing, also called calendar rebalancing, is a fixed schedule of portfolio rebalancing. This method of portfolio rebalancing can be excellent for those who need to have it on the calendar. You can choose to look annually, quarterly, or monthly. For a higher risk portfolio, more often is better. Scheduling quarterly rebalancing is a solid strategy for investors with a low-risk strategy and want to be relatively hands-off.
Percentage-of-Portfolio Rebalancing is when you adjust a portfolio after an asset changes by a certain percentage or amount. This method can safeguard a portfolio from becoming undesirably weighted in a risky asset type by setting a more narrow range by which the allocation is allowed. For example, emerging market equities are given a 20-30% corridor, with the desired percentage being 25%.
Active Rebalancing is when you actively rebalance your portfolio as needed to take advantage of short-term market changes. Active rebalancing is a more labour intensive strategy often used with higher risk portfolios due to the volatility of the market changes that the investor wants to take advantage of through frequent buying and selling.

Ultimately, rebalancing will depend on you. Do you have the time for continuous rebalancing, or do you want a more set-it-and-forget-it style portfolio? Rebalancing is essential for any investment portfolio. It means that an investor is staying well-informed and aware of how their investment portfolio performs and how things are diversified. It is essential to rebalance your portfolio when you are involved in alternative investments or riskier stock trading. Portfolio rebalancing means protecting your assets by maintaining the right balance to match your goals and risk tolerance.

Part of portfolio management and rebalancing is looking for investments to add to the portfolio to help you grow your assets while remaining in the desired risk tolerance for your strategy. If you’re looking for an alternative investment type to help your portfolio grow while keeping your risks relatively low, a mortgage pooled investment could be the perfect answer. Get in touch with Jordan on our team today to learn more.