Unlocking the Benefits of Portfolio Rebalancing
Portfolio rebalancing means selling some of the holdings that have grown above their target weight and buying those that have fallen below it, so the portfolio returns to the asset allocation you chose (for example 60% stocks and 40% bonds). The main benefit is risk control: without rebalancing, the best-performing asset class gradually takes over the portfolio and its risk level drifts away from your plan. Rebalancing also imposes a sell-high, buy-low discipline, though it can create taxable gains in taxable accounts.
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The Pros of Portfolio Rebalancing
There are many benefits to portfolio rebalancing. It encourages investors to take charge of their own financial planning in order to meet their long-term goals. Rebalancing can also help to optimize the degree of risk in an investment portfolio, giving you the opportunity to manage your risk level more effectively. A well-balanced portfolio often increases your chances of success, as you can diversify your investments across numerousasset classesto reduce risk.
Sticking to Your Investment Time Horizon
Part of the challenge of rebalancing is sticking with your investments in the short-term and staying in line with yourinvestment time horizon. To do this, it’s important to focus on achieving your longterm goals rather than worrying about the short-term market fluctuations. This way, you won’t have to worry about making the wrong investment decisions when the markets are down. Rebalancing can help you stick to your plan. Doing it inside tax-advantaged accounts, or with new contributions, limits the taxable gains it creates.
Maximizing Your Diversification
Finally, portfolio rebalancing helps you maximize your diversification. Diversification means spreading investments across sectors, companies, and asset classes such as stocks and bonds to reduce the impact of any one holding. Rebalancing keeps that mix at the weights you set. Rebalancing your portfolio can help you stay on top of which form of investments you should be considering.
MarketXLS Can Help Unlock the Benefits of Portfolio Rebalancing
MarketXLS pulls current prices into Excel (for example =Last("SPY")), so a rebalancing sheet can multiply shares by price, compare each holding's current weight with its target, and calculate the dollar amount to buy or sell. The MarketXLS portfolio manager also tracks holdings and risk metrics. Learn more about how to use MarketXLS for portfolio risk management.
Relevant blogs that you can read to learn more about the topic
Secrets to Smart Investing from Larry Swedroe
Magic Formula Investing Screener In Excel
Portfolio Risk Management (With Marketxls)
The Power of Rolling Your Options
