An Important Fundamental of Investing - Rebalancing of Portfolio

Rebalancing of portfolio is one of the fundamentals that an Investor has to carry out with discipline, in order to be successful in investing. 

Let's suppose that you have a $100,000 portfolio, made up of 2 funds at 50% allocation each. The 2 funds are of different asset classes and draws varying performances. So let us imagine this over a period of one year: the first fund, called Fund A, fetches a decent gain of 10%; And the second fund, called Fund B, only manages a return of 1%.

As a result of the above stated performances over a year, Fund A is now worth $55,000 and Fund B is now worth $50,500. The total portfolio gain is $105,500. While I can imagine most Investors would just sit on this portfolio and count on the profit, let us review the allocation weighting after a year: Now, Fund A has a weighting of 52.13%, and fund B has a weighting of 47.87%, of your portfolio (PS: Still remember what was the allocation in the beginning?).

Maybe this may not look too much of a different with how you had started with, at least not for the first year. But can you imagine if your portfolio continues to be managed unprofessionally (ie. poor discipline/awareness in rebalancing) over time, your risk and reward will become somewhat different with what you have intended.

Allow me to illustrate 3 reasons on why you have to rebalance your portfolio at least once, if not, twice a year.
Reason 1:
The first reason is what I have probably stated above. That is, as your portfolio moves, your risk and reward moves. The effect spurning off from the absence of rebalancing a portfolio for a short period of time (e.g. 1 year or less) may somewhat appear insignificant, but the failure to do so for a longer period of time would concomitantly result into a very different portfolio with how you had wanted it to be. By rebalancing the portfolio, you are making adjustment to realign with your original intention in investing into that particular portfolio.

Reason 2:
By rebalancing your portfolio, you are essentially taking profit on the funds that have made you money and putting more money on the underperforming fund (if you still believe in the thesis of investment in the first place). Such an exercise, also allows you to review all the funds that you have in your portfolio.
This is especially essentially as most people harbour a "out of sight, out of mind" mentality when it comes to investing.

Reason 3
If you and/or your advisor is/are diligent enough in rebalancing the portfolio at least once a year, your return on investment would be much smoother than otherwise. It's because each asset class carries different risk profile and return expectation. By doing the above, you are also applying Dollar-Cost-Averaging strategy on the fund that is under-performing.

I hope that you have or would have taken to heart on the above matter (in due time). If you are still not totally convinced or clear with how such an act (rebalancing) could have an effect on your portfolio, please do not hesitate to contact us.