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Rebalancing your portfolio: Here’s what that means and how often you should do it

Giovanny Moreano, Bankrate.com on

Published in Home and Consumer News

By taking the time to review and make adjustments to your asset allocation, you might also become aware of potential opportunities to buy low and sell high.

Types of portfolio rebalancing

There are various strategies for rebalancing your portfolio. The type of strategy you use depends on your investment goals and life stage.

For example, starting a family may mean you want to allocate more of your money toward a college savings account. Planning to buy a house might mean having more cash on hand for a down payment. Getting a promotion might translate to maximizing your retirement accounts.

Once you determine your financial objective, you can calibrate your portfolio accordingly.

For most investors, the most common reason to rebalance a portfolio is diversification. Through this strategy, you seek to ensure asset allocations remain consistent and in-line with your investment goals.

 

Another strategy for asset allocation is called “smart beta,” where you use a combination of professionally managed index funds and thematic investments.

With index funds, for example, investors are able to mimic the performance of a basket of stocks that make up an index like the S&P 500. In this case, an investor would purchase an exchange-traded fund (ETF) or a mutual fund. Through one of these investments, you gain exposure to all the stocks in that index.

Another option is thematic investing through ETFs or mutual funds. There are thousands of them tracking investment themes such as 5G technology, electric vehicles, cloud computing, cybersecurity and sustainability — to name a few.

But contrary to index funds, where fund managers follow an index, active investing is tied to a fund manager’s ability to select stocks. As a result, these types of investments tend to be more volatile.

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