What is Rebalancing?
Rebalancing is adjusting your portfolio by buying or selling certain “assets” to maintain the original (target) allocation. Usually to ensure the level of risk taken is maintained.
You don’t have to do anything to your portfolio for it to change naturally, some of your investments will do particularly well while others won’t. (That was the whole point of diversifying your portfolio in the first place!). Those investments that have done well will naturally begin to take up more of your portfolio and those that haven’t will take up less.
It is a good idea to periodically readjust your portfolio in order to restore its original balance. If your investment goal hasn’t changed, your portfolio’s mix shouldn’t, either. Because of market forces and varying returns it does.
Portfolio made up of 50% shares and 50% cash.
Let’s say over 5 years your shares grow at 10% per year, whereas your cash grows at 1% per year, here is what happens:
The above is trying to demonstrate it simply, however a modern portfolio of investments will be made up of many different assets such as property, UK, Europe, US, Far East, Gilts, Bonds and many others. Possibly as many as 50 different funds meaning it becomes more important than ever to not let your investments drift!
* All figures rounded to 0 decimal places