Imagine you are at your favourite ice cream parlour, and you have to choose scoops of ice cream that will accompany your crispy cone. You want them all. But how many scoops can balance on the cone? Although there is evidence that you could stuff about 21 scoops (we’ve tested that for you), it doesn’t mean you should. Why? Because all your scoops will begin to melt and be challenging to maintain. Instead, they will end up on your t-shirt, and you will end up dirty and broken-hearted.
The same applies to your trading portfolio. Building and maintaining a portfolio is not an easy task, as it involves research, targeting and decision-making. One of the main aspects of portfolio management is reducing the risk involved in trading (therefore allowing you to enjoy trading a bit more, too!).
Portfolio rebalancing is one of the portfolio management procedures where risk mitigation is achieved through the reallocation of the trading assets.
By rebalancing your portfolio, you can keep the desired level of risk and control in a better way your emotions, for example, when volatility keeps you up at night.
To enjoy both a good night’s sleep and your trading activity, line up your investment with your goals and rebalance your portfolio from time to time.
When you rebalance your portfolio as a trader, it means that you have to:
- Firstly, ensure that your portfolio isn’t dependent on the success or failure of a particular asset class or fund type.
- Mix various assets as per your trading style, goals and money you can afford to lose, i.e. your risk tolerance.
- Add and remove assets in your basket or allocate additional funds to specific assets you are already trading.
“Balance is not something you find. It’s something you create.”
When is the right time to rebalance my portfolio?
While there is no standard schedule for rebalancing a portfolio, experts recommend examining allocations quarterly or at least once a year. Then, of course, you may restore the balance only when you feel that the allocations are significantly off track.
Another strategy, apart from reviewing the portfolio in predetermined time intervals, is to check it whenever the trading conditions change or your portfolio has become unbalanced. For example, if your risk tolerance or investment strategies have changed, the time to reshuffle the cards has come.
As stock performance can vary dramatically, the percentage of assets associated with stocks will change with market conditions. Therefore, when the market moves significantly, you may need to rebalance the weights to match your target asset allocation. A quick reminder: past performance is not always an indication of future performance.
The same applies when the stock percentage of your portfolio has grown considerably in value. Depending on market performance, you may find a large number of current assets held within one area.
Another case is when your financial needs have changed. Then, you may adjust the overall risk to meet such changing financial needs along with the performance variable. Another right timing for rebalancing your portfolio is when you can sell high and buy low.
We’re guessing that now you might want to check new assets to rearrange your portfolio. How about exploring Eurotrader’s instruments and spreads? Trade across five asset classes and enjoy Eurotrader’s competitive spreads and fast execution in every market. We’ve got over 2,000 instruments in forex, cryptocurrencies, stocks, commodities and indices that are ready when you are.