3 Common Investment Scenarios that Call for Portfolio Rebalancing

When was the last time you took the performance of your portfolio into consideration? To ensure maximum gains, you must rebalance your portfolio on a continuous basis by increasing allocation to a high-performing asset class and reducing the same in an underperforming asset-class. At the same time, you have to take into account its impact on your tax liability and transaction costs, etc.

In general, the following are 3 main investment scenarios in which you should seriously consider portfolio rebalancing:

1. When the Risk Factor Isn’t Balanced
   When diversifying your portfolio, it’s important that you divide the funds into different asset classes in a way that the risk is minimum. In fact, each type of fund should have a certain role in the portfolio and complement the other funds.

2. When Your Income Growth Pushes the Investment Scope
   If you receive a massive bonus, then it’s best to realign your investments so that there is room for a fresh investment. However, if there is a growth in your salary or there is a new income involved, then it’s better to put the money in existing asset classes appropriately on a regular basis. The key is to identify the gaps in the portfolio and use the excess income for plugging the same.
3. When Your Financial Goals Change
   You can’t set your financial goals without linking them with a timeline. This is because different types of investments yield the results within different timeframes. Also, in most cases, the higher is the return, the more is the risk. So, you have to diversify your investments (fixed deposits, equities, bonds, etc.) in a way that you are able to meet your financial goals within the time you want. However, when your financial goals change, say, you want the returns faster, then you may transfer some money into high-risk and high-yield funds.
   Smart investors know the significance of portfolio rebalancing. This is because staying with a passive portfolio can easily minimize the returns and in fact, lead to possible loss too. Needless to say, portfolio rebalancing is more important than you may think.

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