Portfolio rebalancing

Why might I not want to rebalance?

Rebalancing means letting go of your winners. Pro investors like Warren Buffett advocate finding a few good investments that you think will keep delivering strong returns and holding on to them… forever.

Selling your strong performers in order to buy more of your weaker ones might not be the best move – especially if those weaker ones are increasing your risk (if a company’s finances are looking rocky, for example).

Furthermore, changing economic conditions could make your initial split seem less wise over time: an environment in which interest rates are expected to rise makes existing bonds less attractive (and stocks more so).

There’s also some evidence to suggest rebalancing doesn’t always boost your returns. 🤔 One investment strategist found that when the assets in a portfolio provide about the same return over an extended period, rebalancing does better than a “buy-and-hold” strategy in two out of three cases.

But on the rare occasions when buy-and-hold does better, it does way better – and so, on average, the returns provided by both strategies end up pretty much equal. What’s more, if some of the portfolio’s investments increase more than others in value, a buy-and-hold approach can even provide a better average return than rebalancing 🧐

Added to this is the fact rebalancing is essentially “active” investment management. If you’re managing your own portfolio, you’ll likely be charged trading fees every time you tweak your holdings – and so overzealous rebalancing can quickly swallow up your precious profits.

Well, Wealthyhood users, that’s not for you. You can invest and rebalance whenever you want. 🤫

What do professionals do?

According to one finance professor 🧑🏻‍🏫, most professional investors don’t rebalance their portfolios. But that doesn’t mean you shouldn’t do so.

While it might not bring you better returns, rebalancing does help with risk. ⚖️ Sudden share crashes can wipe out your gains if you’re too heavily invested in the stock market. That doesn’t matter too much for professional investors who can always re-roll the dice, but if you’re close to retirement, a big loss could be devastating.

By making sure you always have a well-balanced portfolio, you can reduce the chance of any one event forcing you to stay at work forever. 💀

Ultimately, only you can decide if rebalancing is worth the effort.

But to do that, you need some means by which to measure your success. In the final chapter, we’ll look at some options – how long is a piece of string, anyway?

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Remember - when you invest your capital is at risk. This learning guide is for information purposes. Past performance is not a guarantee of future returns.