Rebalancing refers to the process of moving funds between your investments. In other words, it is the process of selling an asset in your portfolio, then using the proceeds to buy another asset.
People need to rebalance when they create portfolios with certain percentages allocated to different kinds of assets. Over time those percentages can get out of whack with the original plan, and so they rebalance to put their portfolio back on track.
Below are the most common reasons people need to rebalance their portfolios —
- Price changes in your investments
- If your investment goals have changed
Example: Sam wants 35% of their money in non-Canadian stocks and 65% in ultra-conservative bonds as a 10-year investment strategy.
- Over the past month, the price of their stocks goes down.
- They now have 20% of their money in stocks and 80% in bonds, which is more in bonds than they wanted.
- So, they rebalance their portfolio. To do this, they sell some of their bonds and reinvest the funds into stocks to bring the balance back to 35% / 65%.
Advantages and disadvantages of rebalancing your portfolio
Advantages of rebalancing
- Keeps risk under control in your portfolio
- Takes some of the emotion out of investing
Disadvantages of rebalancing
- Accurate calculations are necessary to successfully rebalance your portfolio
- With a smaller portfolio, the cost of constantly buying and selling can be expensive
How Wealthsimple approaches rebalancing
Portfolios are automatically rebalanced due to deposits, withdrawals, or changes in your overall goals to ensure that your asset allocation stays consistent with what you initially had set up.
Price changes in your holdings, however, require more consideration when rebalancing. With Wealthsimple, if your portfolio's weights differ from the original plan weights by more than 30%, your portfolio will be rebalanced by the next business day.
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Example: Charlie has a portfolio where Canadian equities are set to 10% of their portfolio's asset allocation.
- If Canadian stocks increased in price to a 13% or more weighting (relative to other investments held), then the portfolio would be rebalanced by selling some Canadian stocks
- Similarly, if Canadian stocks drop to a 7% or less weighting (relative to other investments held), then the portfolio would be rebalanced by buying more Canadian stocks