Portfolio Rebalancing Calculator

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What is Portfolio Rebalancing?

Portfolio rebalancing is the process of realigning the weightings of assets within an investment portfolio. Over time, as market conditions change, the value of your investments can drift away from your original allocation goals. Rebalancing involves buying and selling portions of your portfolio to restore your desired asset allocation.

Rebalancing is crucial for maintaining your risk tolerance and investment strategy, ensuring your portfolio continues to align with your financial goals.

Portfolio Rebalancing Example

For example, if your target allocation is 60% stocks and 40% bonds, but due to market fluctuations, your portfolio shifts to 70% stocks and 30% bonds, you would sell some stocks and buy bonds to return to your original 60/40 split.

How to Rebalance a Portfolio

Rebalancing a portfolio involves assessing your current asset allocation, comparing it to your target allocation, and making adjustments to bring it back in line. Start by reviewing your current investment distribution, then determine the amount to buy or sell in each asset class. Finally, execute the necessary trades to restore your desired balance. Some investors choose to rebalance manually, while others use automated tools or services that perform the task regularly.

When to Rebalance a Portfolio

Portfolio rebalancing can be done on a regular schedule, such as monthly, quarterly, or annually, or in response to significant market movements. Some investors rebalance when their asset allocation deviates by a certain percentage from their target. The ideal frequency depends on your investment strategy, risk tolerance, and the costs associated with rebalancing. Too frequent rebalancing can lead to higher transaction costs, while infrequent rebalancing may allow your portfolio to drift too far from your goals.

Portfolio Rebalancing Strategies

There are several strategies for rebalancing a portfolio. The most common approach is time-based rebalancing, where you adjust your portfolio on a regular schedule. Another strategy is threshold-based rebalancing, where you only rebalance when your allocation deviates by a set percentage. A third approach is cash flow rebalancing, where new investments or withdrawals are used to adjust the allocation without selling existing assets. Each strategy has its own advantages and considerations, depending on your financial goals and market conditions.