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Last updated on 2024年6月13日

What are the key indicators to watch when rebalancing your portfolio?

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Rebalancing your portfolio is a vital part of maintaining a healthy investment strategy. It involves realigning the weightings of assets in your portfolio to keep it aligned with your goals and risk tolerance. Over time, some investments may outperform others, leading to an imbalance that can expose you to greater risk or missed opportunities. Monitoring key indicators helps you decide when and how to adjust your asset allocation to optimize performance. This article will guide you through the essential indicators to watch that signal it's time to rebalance your portfolio.

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Stanley Mombera

Chartered Accountant || Budding Computer Programmer || Investment Analyst

1 Asset Mix

Your asset mix, the proportion of stocks, bonds, and other securities in your portfolio, should reflect your investment goals and risk tolerance. When certain asset classes outperform others, your portfolio can become overweight in one area, increasing risk. For instance, if stocks have had a strong run, they might represent a larger portion of your portfolio than intended. Monitoring your asset mix regularly ensures that you can rebalance to maintain the desired level of risk and potential for returns.

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Stanley Mombera

Chartered Accountant || Budding Computer Programmer || Investment Analyst
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Why it matters: The asset mix, or asset allocation, is the distribution of your investments across different asset classes (e.g., stocks, bonds, real estate). It reflects your risk tolerance, investment goals, and time horizon. What to watch: Regularly compare your current asset mix to your target allocation. Market movements can cause significant shifts in the value of different assets, leading to a drift from your desired allocation. I recentlynoticed that my portfolio was initially set to have 60% in stocks and 40% in bonds. After a year of strong stock market performance, my portfolio drifted to 70% stocks and 30% bonds. To get back to my target asset mix, I sold some stocks and bought bonds to rebalance to my original 60/40 allocation

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2 Performance Gap

Comparing the performance of your assets against their benchmarks is crucial. If you notice a widening gap, it may be time to consider rebalancing. For example, if your international stocks are lagging behind their benchmark while domestic stocks are surging ahead, it could indicate an imbalance that needs addressing. Periodic reviews of performance gaps can signal when to buy or sell assets to bring your portfolio back into alignment with your investment strategy.

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Stanley Mombera

Chartered Accountant || Budding Computer Programmer || Investment Analyst
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Different assets and individual investments will perform differently over time. This divergence can lead to an unbalanced portfolio.Therefore Assess the performance of your investments relative to each other and your expectations. Significant outperformance or underperformance might necessitate rebalancing to maintain your intended asset allocation. Over the past year, my tech stocks have significantly outperformed my real estate investments. This created an imbalance where tech stocks now make up 35% of my portfolio instead of the intended 20%. I rebalanced by selling some tech stocks and reinvesting in real estate to close the performance gap.

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3 Risk Assessment

Evaluating the level of risk in your portfolio is essential. If the risk profile of your investments has shifted and no longer matches your risk tolerance, rebalancing is necessary. This could happen due to market volatility affecting certain sectors more than others. By keeping an eye on the risk level of your portfolio components, you can make informed decisions on when to adjust your holdings to align with your comfort with risk.

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4 Time Horizon

Your investment time horizon is the expected period until you need to access your funds. As this timeframe changes, so should your portfolio composition. If you're nearing retirement or the goal for which you're investing, it may be wise to shift towards more conservative investments. Monitoring your time horizon helps ensure that your asset allocation stays in sync with your changing needs and goals.

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5 Tax Implications

Rebalancing can have tax consequences, especially if it involves selling assets for a gain. Consider the tax implications before making any moves. For example, you might delay selling an asset that's just short of qualifying for long-term capital gains tax rates. Understanding the tax impact of rebalancing decisions can help you keep more of your investment returns after taxes.

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6 Liquidity Needs

Your need for liquidity, or access to cash, can influence when you rebalance your portfolio. If your financial situation changes and you require more liquid assets, it might be time to adjust your holdings. Keeping an adequate level of liquidity ensures that you can cover unexpected expenses or take advantage of new investment opportunities without being forced to sell off assets at an inopportune time.

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Stanley Mombera

Chartered Accountant || Budding Computer Programmer || Investment Analyst
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Liquidity needs can change over time due to life events, such as buying a house, funding education, or unforeseen expenses. Ensure you have enough liquid assets to cover short-term needs without disrupting your long-term investment strategy. This might involve adjusting your asset allocation to include more liquid investments. Recently, I’ve had to rethink my portfolio because of some significant upcoming expenses. I'm planning to buy a new house and also want to start setting aside funds for my future kid's education. Additionally, I want to have a safety net for any unforeseen expenses like medical emergencies.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the key indicators to watch when rebalancing your portfolio?

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5

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7

1 Asset Mix

2 Performance Gap

3 Risk Assessment

4 Time Horizon

5 Tax Implications

6 Liquidity Needs

7 Here’s what else to consider

Business Management

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What are the key indicators to watch when rebalancing your portfolio?

1

2

3

4

5

6

7

1 Asset Mix

2 Performance Gap

3 Risk Assessment

4 Time Horizon

5 Tax Implications

6 Liquidity Needs

7 Here’s what else to consider

Business Management

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