Why You Need to Rebalance Your Portfolio
Establishing the right asset mix for your individual needs is a critical first step in achieving investment success. But maintaining that target mix through rebalancing is almost as important.
Rebalancing is necessary because the various asset classes in your portfolio - international equities, Canadian fixed-income, etc. - surge and stall at different times in the market cycle. Our clients are often surprised to learn that, historically, every asset class has delivered the best returns in some years and every class has been marked as the year's worst performer.
Without intervention, the latest best performer can quickly take up a larger share of your portfolio. While this may sound like a good thing, it actually means you will be taking on more risk, as you will be overexposed to that particular component. Again, based on history, we know that today's winner can quickly become tomorrow's loser (think Nortel), and vice versa.
Rebalancing is done by selling investments in asset classes that exceed their target weighting in the portfolio, thereby "locking in" those gains. The proceeds are then shifted to those classes that are currently underweight.
Managing risk in your portfolio is the primary reason for rebalancing, but there is another benefit. Although there are no guarantees, by helping you to "sell high" and "buy low", rebalancing may enhance your portfolio's returns over time. One well-known study by Yale found that rebalancing can increase returns by as much as 1.6% annually.
As part of our portfolio services, we will help you capitalize on the full benefits of asset allocation and rebalancing to keep your portfolio on track toward your goals. To find out more, give us a call.
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