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The Basics Of Portfolio Rebalancing – Jim DePalma

The Basics Of Portfolio Rebalancing - Jim DePalma

Are you looking to manage your portfolio more effectively while pursuing different investment strategies? If so, then understanding and implementing portfolio rebalancing may be the key to success. Rebalancing a portfolio requires creating an effective asset allocation strategy; that is, determining appropriate weights for different asset classes within an individual’s or business’ financial circumstances. According to Jim DePalma, by regularly evaluating and potentially adjusting investments over time to maintain balance in the portfolio of assets, one can aim for long-term objectives with greater ease than if relying on the periodic reallocation of funds without any management plan. Below are the basics of how to go about properly rebalancing your portfolio to achieve desired returns on those investments.

Jim DePalma Lists The Basics Of Portfolio Rebalancing

Portfolio rebalancing, as per Jim DePalma, is a process of restoring the balance between different securities, such as stocks, bonds, and other investments. Rebalancing allows investors to adjust their portfolio allocations to their original desired levels after market movement or external factors have caused them to deviate from an initial target weighting. This practice helps keep a portfolio diversified and aligned with an investor’s goals.

There are three main reasons why it is important to rebalance a portfolio: maintain risk level, maximize return potential, and increase tax efficiency. By maintaining the risk level of a portfolio, investors can ensure that they stay within their comfort zone for volatility and risk tolerance; if too much of the portfolio has been allocated to high-risk investments, investors may not be comfortable with the portfolio’s performance. Rebalancing can also help maximize return potential by reallocating capital to different sectors or asset classes that have more favorable prospects and improving the overall risk-return profile of a portfolio. Finally, According to Jim DePalma, rebalancing can increase tax efficiency by taking advantage of losses to offset gains in other portions of an investor’s portfolio.

When considering how often to rebalance a portfolio, there are three main strategies: periodic (time-based), tolerance range (asset mix-based), and threshold (deviation from original target allocation). Periodic strategy is simply when investors set a specific time frame for rebalancing; this could be quarterly, semi-annually, annually, or even every few years, depending on their goals. Tolerance range strategy means that investors can establish a maximum or minimum tolerance within which an asset class must remain before any reallocation should take place; for example, if the original desired allocation of stocks to bonds is 50/50, then an investor could set a tolerance range of +/- 5%, so anytime the ratio strays from 45-55%, it’s time to rebalance. Finally, the threshold strategy requires investors to rebalance when there is a certain deviation from the target asset allocation; this could be whenever two assets deviate more than 10%, 15%, or 20%.

Jim DePalma’s Concluding Thoughts

Rebalancing portfolios has become increasingly popular in recent years as more and more people realize its importance, says Jim DePalma. According to a study by Vanguard, rebalancing increases returns on average by 0.37% annually and reduces risk by 3-5%. Another study conducted by Morningstar showed that investors who did not rebalance their portfolios underperformed those who did by an average of 2.9%. These statistics show the potential long-term benefits of rebalancing a portfolio.