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Portfolio Rebalancing

Portfolio Rebalancing

Portfolio rebalancing means periodically adjusting the allocations in a portfolio to restore the original targeted allocation.  Rebalancing is an effective strategy to keep your portfolio aligned to your targeted portfolio allocation models.   

For example, a simple portfolio with a 60/40 allocation between the S&P 500 and intermediate-term US Treasury Bonds. In 2003, the S&P 500 experienced significant positive returns and US Treasuries experienced significant negative returns.  As a result, this portfolio would have had an allocation closer to 30% U.S. Treasuries and 70% S&P 500 at the end of 2003. Rebalancing would have required the investor to sell a portion of the stock holdings (sell high) and invest that capital in the bonds (buy low) to bring the portfolio back to a 60/40 composition.  

First Asia Investor makes specific baseline portfolio allocation recommendations, but because our members implement our model portfolios at varies times, its critical that our members review and monitor their portfolios and make periodic rebalancing adjustments to stay in line with our recommendations.  

Our recommendation that our clients review their portfolios periodically, calculate the percentage of their assets in each asset category and compare those percentages with First Asia recommended model portfolio allocations. When making rebalancing decisions, investors should take into account transaction expenses and potential adverse tax consequences from short term holding periods (less than one year).  Variances of a few percentage points from our recommended allocations do not necessarily require rebalancing, but we recommend that portfolio holdings not stray too far from our recommended percentages.

 

 

 

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