Portfolio Rebalancing Explained - What, When, Why, and How

Описание к видео Portfolio Rebalancing Explained - What, When, Why, and How

Portfolio rebalancing refers to adjusting the allocations of different assets to maintain a desired risk profile. In this video I'll explain what rebalancing is and when, why, and how to do it.

// TIMESTAMPS:

00:00 - Intro
00:11 - What Is Portfolio Rebalancing?
01:04 - Why Is Rebalancing Important?
03:20 - How Often Should You Rebalance Your Portfolio?
04:29 - Rebalancing in a Taxable Account (Tax Consequences)
04:59 - How To Rebalance Your Portfolio
06:00 - Outro

// SUMMARY:

Portfolio rebalancing refers to bringing the assets in one's portfolio back to the target asset allocation, which is the specific ratio among assets for a desired risk profile. Specifically this means selling overweight assets and buying underweight assets.

Why is rebalancing important?

First, your target asset allocation has [hopefully] been set based on your personal goal(s), time horizon, and risk tolerance. If the portfolio strays from that target allocation, it no longer aligns with those things.

A misaligned portfolio is now either too aggressive or too conservative; either case is potentially problematic, especially for retirees. A disciplined investing approach is crucial for long-term success. By not rebalancing your portfolio, you are letting the markets determine its level of risk. Rebalancing is also a good time to double check your risk tolerance.

Secondly, while it may seem counterintuitive at first glance, rebalancing is quite literally buying low and selling high, as you are selling the asset that has risen and buying the asset that has fallen.

In that sense, rebalancing at regular intervals forces the investor to avoid their own behavioral biases.

Lastly, rebalancing maintains the portfolio's diversification over time. As allocations stray, the portfolio becomes more concentrated in one asset, which decreases diversification and increases risk.

Annual rebalancing is fine and the evidence says that anything more frequent is probably unnecessary.

Here are the steps to rebalance:
1. Login to your account once a year.
2. View the values of your assets and calculate how much you need to buy and sell of each.
3. Buy and sell as needed.

Some brokers may have a one-click “Rebalance” button, which is extremely convenient. M1 Finance has this, for example, in addition to the dynamic rebalance wherein new deposits are directed to underweight assets.

You may need to do this in multiple accounts, such as a 401k with your employer and your own Roth IRA.

If you're using a target date fund, it will do the rebalancing for you.

Read the blog post here: https://www.optimizedportfolio.com/re...

#investing #investmentmanagement #portfoliomanagement

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