Rebalancing Your Portfolio

You'll need to monitor your portfolio to ensure it stays in line with your investment goals

Morningstar.co.uk Editors 11 July, 2013 | 9:00AM

So you’ve built a portfolio that perfectly matches your needs. If only you could kick back and ignore it until retirement. In order to keep your portfolio in shape, you have to monitor it on a regular basis. You’ll want to reevaluate all of your funds and make sure that you don’t have a reason to sell any of them. You’ll also want to make sure that your asset allocation hasn’t become lopsided—and if it has, you’ll want to rebalance your holdings. In this lesson, we’ll examine why rebalancing matters and offer our suggestions for how and when you should rebalance your portfolio.

Why Rebalance?

Say that you originally constructed a portfolio of 60% stocks, 30% bonds and 10% cash. If left alone over a 20-year period, that portfolio could easily morph into a blend of 84% stocks, 13% bonds, and 3% cash. Presumably, you set up your original allocation to match your needs and your risk tolerance. If neither has changed, your allocation shouldn’t either. For example, if stocks take over your portfolio (as they did in our example), your returns may rise but so will your risk. Moreover, you may find yourself with insufficient cash on hand to meet short-term needs. The only way to return the portfolio to the original risk level is by buying and selling funds until you reach your original allocation. That’s what rebalancing is.

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Morningstar.co.uk Editors  analyse and report on shares, funds, market developments and good investing practice for individual investors and their advisers in the UK.

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