Part 19: Portfolio Rebalancing

In this post, we’ll dive into portfolio rebalancing, a key strategy that helps investors keep their investment portfolios aligned with their financial goals. Whether you’re a beginner or a seasoned investor, understanding how to rebalance your portfolio can help you manage risk and stay on track.

Why is Rebalancing Important?

Portfolio rebalancing is the process of adjusting the weights of assets in your investment portfolio to maintain your desired allocation and manage the risk. Imagine your portfolio as a garden, with trees representing different assets (like stocks, bonds, and ETFs). Over time, due to weather (market performance), some trees grow more than intended, occupying more space than intended, shifting your original portfolio balance. Rebalancing brings it back to your target mix.

As we age, our investment horizon becomes shorter, and the best practice is to raise the specific weight of less risky instruments (like bonds) in our portfolio because they are less volatile. Younger investors have more time to recover from market fluctuations, even if the market takes a few years to recover and grow, while older investors might have less risk tolerance for such fluctuations.

There is an approach that suggests subtracting our age from 100. is the portion of our portfolio (expressed as a percentage) that we can invest in instruments with higher risk like stocks. The rest is the percentage to be invested in less risky instruments like bonds. For example, if a person is 30 years old, he/she can aim for a portfolio composed of 70% stocks, 30% bonds. A person aged 60 can aim for 40% stocks, 60% bonds allocation.

How to do Portfolio Rebalancing?

For example:

• We start with a 100,000 AMD portfolio, with 60% in stocks (60,000 AMD) and 40% in bonds (40,000 AMD), a 60/40 allocation.
• If stocks perform well, growing by 20% to 72,000 AMD, while bonds remain stable at 40,000 AMD, our total portfolio becomes 112,000 AMD. Stocks now make up 64% (72,000 ÷ 112,000) of our portfolio, and bonds drop to 36% (40,000 ÷ 112,000).
• To rebalance back to 60/40, we sell some stocks (e.g., 4,800 AMD worth) and buy more bonds to restore 60% stocks (67,200 AMD) and 40% bonds (44,800 AMD).

It’s important to remember that investments are subject to market fluctuations and carry inherent risks. Consider your financial goals and risk tolerance before investing.

Apricot Capital is regulated by the Central Bank of Armenia.

The examples in this text are for illustrative purposes only. This does not constitute investment advice or a recommendation to buy or sell any specific investment instrument. The past performance mentioned in this text is not indicative of future results.