Balancing and Rebalancing your Investment Portfolio

Balancing your investments means building a portfolio that is tailor-made to your individual risk tolerance and investment goals. The construction of an investment portfolio, especially when this task is delegated to a portfolio manager, depends on the investment policy statement (IPS). This document determines investment style and strategies that must be used by a portfolio manager to reach their clients’ objectives. Seeing as the market fluctuates, and that asset behaviors change over time, maintaining the good health of your investment portfolios requires monitoring.

Portfolio managers are investment decision-makers

Portfolio rebalancing helps to recalibrate investments

Portfolio managers and great investors usually differentiate themselves not only by identifying which investment vehicles are performing on a subpar level over a specific timeframe, but also by selecting vehicles that can maximize returns. Essentially, portfolio rebalancing acts as a tune-up for your investments. The purpose of this action is to align an investor’s risk tolerance with their long-term financial goals. It also gives the investor a chance to review the types of investments they hold. The portfolio manager’s primary goal when rebalancing is to ensure that their client’s portfolio is not singularly dependent on the success or failure of a particular investment, asset class, or fund type.

An example of how portfolio rebalancing can operate

Let’s assume that you invested USD10,000 in mutual fund A and USD10,000 in mutual fund B in January 2022. After one year, your investment of USD20,000 doubles up and is now valued at USD41,000.

After analyzing the performance of fund A and fund B, your portfolio manager informs you that  the two funds have not performed equally as well. So, while your investment in fund A is now valued at in USD17,000 at the end of the year, your investment in fund B is now worth USD24,000. When you began your investment, both the funds had the same weight. At the end of year 1, however, one fund dominates your portfolio making up approximately a 60% share. If in the coming years fund A were to perform as it had during year 1, then this may affect your investments negatively.

This is where portfolio rebalancing may come in handy. During this exercise, a seasoned wealth manager would analyze your portfolio in its entirety to alleviate risks and maximize profits.

Being a stockholder entitles you to certain benefits

Investments, much like investors, evolve…

Portfolio rebalancing is also an occasion to keep up with fast-paced market changes. It allows you to calibrate your investments with your goals. If upon your own study and comprehension of the market, your risk tolerance or your investment strategies change, then you can rebalance the weight of the asset class in your portfolio by reassessing and devising new asset allocations.

AXYS Wealth Creators advise clients on how to better invest their wealth. Get in touch with us now.

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