Rebalancing your portfolio

Typically when you build and allocate your portfolio, you consider your risk and investment goals. One way to stay on track with these things is to manage or “rebalance” your portfolio. This is also because investments grow at different rates, and over time your portfolio could drift away from your strategy. When you rebalance your portfolio, you’re reorganizing your investments to fit your target asset allocation.

Please note: The information prepared in this section is for educational purposes only, and should not be taken as any form of trading or investment advice.

How a portfolio can become unbalanced

Since investments have different levels of risk and returns, it may “unbalance” your target portfolio over time if not checked and rebalanced accordingly. Let’s look at a hypothetical example below.

Say your target portfolio allocation is split into four ETFs (30/30/30/10 split) with different levels of risk and return. The first three assets (“ETF A” to ”ETF C”) have 30% allocation. However, the last one (ETF D) has only a 10% weighting because despite its higher return, it comes with more risk. Please note that this asset allocation will depend mostly on your investment goals and risk tolerance.

Since ETF D has a higher return, it may eventually take up more of your asset allocation. In this case a year later, ETF D increases to 14% while the rest of your assets went down a bit. The second year comes and ETF D continues to increase to 19% of your asset allocation while the others continue to decrease their weightings. This exposes you to more risk as your higher risk asset (ETF D) is now taking up more of your portfolio. If this happens, you may want to rebalance your portfolio (manually or with an automated rebalancing tool) to readjust it to your target asset allocation.