Investing isn’t just about selecting the right assets; it also involves maintaining their proper balance over time. This is where rebalancing plays a crucial role. Without regular adjustments, your portfolio might veer off from your desired risk and return objectives, inadvertently exposing you to greater risk than you bargained for.
Why Does Your Portfolio Veer Off Course?
As time goes by, different asset classes grow at varying rates. Let’s say equities perform exceptionally well—they might start to take up a larger portion of your portfolio than planned, increasing your susceptibility to market swings. On the flip side, if bonds experience strong growth, they could end up dominating your allocation, potentially stunting your growth opportunities. Rebalancing is the methodical process used to realign your portfolio with its target allocation, making sure it stays in sync with your long-term financial ambitions.
Consider the Airplane Analogy: Even Slight Deviations Can Lead to Big Changes
Picture yourself on a flight from Singapore heading to London, but the plane’s navigation system is just a tad off course. Initially, it may seem like a trivial error, but after traveling thousands of kilometers…
