Creating a healthy portfolio which fits your needs was already difficult. You need money for short-term and long-term goals and we never know when it is the right moment for buying and selling. We don’t have a crystal ball which shows us the future of our investments. The only thing we know is that you make the highest profit if you buy low and sell high. Diversification is the key to have success.
Your risk tolerance, your age and your future goals are important issues for your investment portfolio. You have determined your investment profile and you know the right mix of your investment instruments you need for a healthy investment portfolio. You started with the right mix in cash, bonds, shares, mutual funds and some other assets and you probably think you will reach the desired returns. This is certainly wrong because the returns of every investment instrument are different and may cause your investment portfolio to not conform with your investment profile anymore.
Rebalancing your investment portfolio is necessary and needs to be done at least once a year and it is sometimes recommended to do this more frequently. You can best set a fixed date to check your investment portfolio and to take actions for rebalancing. Maybe you have difficulties to understand why you need to rebalance. There are two important reasons why you have to rebalance : your age and your investment profile. The returns of your investments are different and you need to rebalance for keeping your investment portfolio healthy or your investment strategy is changed because you want to lower your risk because you come nearer to the age of retirement.
Rebalancing your investment portfolio is not an easy job. It is easy to understand you need to buy and sell investment instruments to maintain the right mix but it is often a difficult task which assets you sell and which you buy. It is more complicated than creating a healthy portfolio and many investors make the wrong decision by keeping their best performers.
For example, you started with 20% cash, 30% bonds and 50% stocks. It is possible you reached a high return with your stocks and your other investments dropped or raised only a little bit. In this case your investment portfolio is not healthy anymore. Maybe you have now an investment portfolio with 20% cash, 20% bonds and 60% stocks. Your risk profile is much higher and you need to rebalance for lowering your risk profile.
It is necessary to sell some stocks and buy bonds to get back the right mix of your investment portfolio. You have to sell some of your investment instruments which reached the highest returns and this is really a difficult decision. Nobody likes to sell their investments which reached high returns but it is necessary because your risk profile will be too high. You have to check now between your winners and some may be not so good and the future doesn’t look great. You can diversify in the sectors of your stocks and sell these where the expectations doesn’t look great.
It is also possible you lost a lot of money with your investment in stocks and you need to buy bonds. You have to look to your losses in stocks and the dilemma is selling the best ones or your worst ones. It is possible you made profit with some of them and you can sell your profit in these stocks and invest them in bonds. It is difficult decision and the market situation is important for making the right decision. During a financial crisis it is unlikely financial stocks will recuperate their losses fast and it is even possible you may never recuperate your money in these stocks back. Maybe you can consider to sell some of your stocks which reached profits and wait until the financial crisis is over before you shift in this sector.
Rebalancing your investment portfolio is necessary because you need to maintain your investment profile to avoid your risk profile will be too high or too low. If you want to avoid all these problems you can best buy strategy mutual funds conform your investment profile and you don’t have to worry about the right mix in shares, bonds, cash and other assets. It is easier but the disadvantage is that your fund manager chooses the stocks, bonds or others assets for investing in his/her fund.
The frequency of rebalancing is a personal decision but it is recommended to rebalance more your investment portfolio more frequently in a volatile market. Your risk profile may be too high and you may lose more money than you can afford. Rebalancing in this situation can help you to reduce your risk level and to avoid a financial disaster.