Thursday, 2 October 2014

Rebalancing & Managing your Portfolio

Rebalancing is a basic part of every investor's journey.

The process of buying ETFs, then subsequently adding to them is only one part of investing.

I've come to realise that rebalancing is an important concept which I must learn.

For example, I set my portfolio target to be 50% stocks and 50% bonds. Or 60/40. Or even 80/20. You get the idea.

Of course, as you advance and become more experienced, your portfolio may look something like this.  Maybe, 60% stock, 20% REITs, 10% Bonds, 5% Cash and 5% Precious Metals?

Your portfolio is customised according to your own preference and risk appetite. Maybe you're a teenager and can afford to ride out a few market ups and downs with the long term in mind. 70% stocks and 30% bonds may be perfect for you. But as you grow older, start a family and eventually prepare for retirement, your risk appetite decreases steadily. You prefer to have 70% in bonds and 30% in stocks. That by itself, is referred to as rebalancing. Rebalancing is an optimal way of managing risk.

However, rebalancing your portfolio can trigger fees in the form of trading costs. Therefore most investors rebalance every month or even every year. To reduce this, you can consider directing fresh funds (Dividends, monthly investments) into your portfolio to rebalance.

Eg: Your Stocks may now be 59% Bonds and 41% Stocks. Instead of selling bonds, you can purchase a larger quantity of new shares for stocks until it's back to your desired quota.

What's your desired asset allocation level? Or do you simply buy dividend stocks and hope for the best? Dividend stocks or ETFs that follow the index? Do you diversify? Have a good think! Please share me with your thoughts :)

Hope this helps!

Signing off,
Teenage Investor

Posts you might be interested in:
1. Emergency Funds
2. My Investment Journey Update: October 2014
3. The Post For All Investors; Seniors & Juniors
4. CMPB- Medical Screening for NS

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