What is Portfolio Rebalancing?

Portfolio rebalancing means restoring the weightings of a portfolio of assets to its target allocation.

This is done by the buying and/or selling of assets to achieve a desired or recommended level of asset allocation in your portfolio.

When utilising a long term passive investing strategy, this would mean you would rebalance via “buying low, and selling high” throughout the course of your investment horizon.

Why is Rebalancing Important?

When investing in a diversified portfolio of various asset classes, it’s natural for a “portfolio drift” to occur. This is when your original asset allocations have shifted due to market movements.

As an example, you may have started your investment journey with a 60% equity and 40% fixed income split. Let’s say over a period of time, due to strong performance in equities, you now have a portfolio weighting of 70% equities and 30% fixed income. This is known as a “portfolio drift,” and the investor is now no longer in a portfolio aligned to their original investment risk preferences.

Rebalancing insures an investor’s portfolio is aligned to their goals and risk preferences throughout their investing journey. If you do not rebalance your portfolio, you will inevitably end up with an asset mix that doesn’t match your risk tolerance.

In short, rebalancing one’s portfolio reduces overall risk, enhances returns, and shortens the amount of time it takes for a portfolio to recover following market volatility.

How to Perform Rebalancing?

Rebalancing can be done in a few ways. Some investors choose to rebalance their portfolios on a scheduled basis. They may set aside a time annually, or semi-annually to rebalance their portfolios. On a given date, they will sell or buy securities within their portfolio to bring it back in line with their target allocations and their risk preferences.

Some individuals will set thresholds at the onset of their investing journey, and when a portfolio drift exceeds this threshold, they will rebalance their portfolios.

Individuals who contribute to their portfolios on an ongoing basis (for example, monthly contributions), they will strategically rebalance their portfolios by allocating any new capital to parts of their portfolio that is underweight to bring it back in line with their target allocations.

Rebalancing can also be done if an investor strategically makes a withdrawal from parts of their portfolio that is overweight to bring it back in line to their target allocation.

At Sarwa, we take care of all your rebalancing needs. We rebalance your portfolios on an ongoing basis by ensuring that a total portfolio drift greater than 12% does not occur across your portfolio of ETFs.

In addition, any new deposits or withdrawals are strategically allocated to the appropriate asset classes to match your investment risk profile. Income derived from dividends in your portfolio are also strategically allocated to ensure it meets your overall investment goals.

Summary of Sarwa’s portfolio rebalancing activities:

1) Threshold based, if 12% variance occurs, we rebalance.

2) From fresh deposits, strategically allocate to underweight asset classes.

3) Dividend reinvestment to underweight asset classes.

4) From withdrawals, strategically withdraw from overweight asset classes.