How to Rebalance Your Portfolio

The best shape for your portfolio changes with your financial needs and personal goals, which means rebalancing your investments is essential. Here’s how you do it

Valerio Baselli 7 January, 2021 | 9:07AM

rebalance

Morningstar has always warned retail investors about the dangers of market timing, namely the strategy of making investment buying or selling decisions by attempting to predict future market price movements.

The opposite to market timing and a commonly recommended strategy is Buy and Hold, an approach where investors choose the best possible asset allocation for their objectives and risk appetite, and keep their holdings period regardless of fluctuations in the market. The main benefits of this strategy lie in the fact that a shrewd investor should always have a medium or long-term horizon, not to mention that with a higher portfolio turnover rate (buying and selling) comes higher transaction costs, together with volatility – and the risk of getting the market timing wrong.

Of course, a buy and hold approach doesn’t mean you should never change your portfolio. Our financial goals, monetary needs and the shape of our portfolios will change over time. Even if you don’t make changes to your holdings, the structure of your portfolio will shift over time because of market changes, which can alter the proportion of your assets you hold in each holding. This is particularly true after periods of high volatility such as the one we experienced with the outbreak of the pandemic in the first half of 2020, when some stocks soared while others sank.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Valerio Baselli

Valerio Baselli  is an Editor at Morningstar Italy.

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