Strategies for effective portfolio rebalancing: Manage risk and maximise returns

This week on Money & Investing, Mitch Olarenshaw and I discuss portfolio rebalancing, sharing strategies to manage risk, and removing emotion from decision-making.

1. What is portfolio rebalancing?

Portfolio rebalancing involves adjusting the allocation of assets to keep a consistent risk level. As some assets perform better or worse, rebalancing helps maintain balance and prevents overexposure to any one asset.

2. When should you rebalance?

The timing of rebalancing is key. It depends on how much your portfolio’s allocation has shifted and your risk tolerance. Some investors rebalance quarterly, while others adjust based on market performance.

3. Why rebalance?

Rebalancing helps manage risk and avoid emotional decisions driven by fear or greed. By following a process, investors can maintain objectivity and focus on long-term goals rather than reacting to market fluctuations.

4. Managing overweight positions

Investors heavily invested in a single asset might consider trimming their holdings or using derivatives like options to hedge risk while still maintaining exposure to potential growth.

5. Dealing with underperformers

Rebalancing isn’t just about managing winners; it also involves handling underperformers. Rather than averaging down, investors should reassess the position and consider exiting if the investment no longer aligns with their strategy.

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The material provided in this article is for information only and should not be treated as investment advice. Viewers are encouraged to conduct their own research and consult with a certified financial advisor before making any investment decisions. For full disclaimer information, please click here.