Add extra returns and reduce volatility
By rebalancing a portfolio you make sure that its characteristics are fully aligned with the expected final composition. This methodical process keeps our objective portfolio ready to face market evolution and volatility in the sense that we sell those assets that evolved better and we buy those that evolved the worst. Only a few investors use this process because, although it’s a very logical strategy, they don’t often have the discipline to apply it.
By using this process not only do we maintain the portfolios desired structure and therefore, the investors desired level of risk, but we are also able to optimize the portfolio’s final return. Some studies have proven that we can obtain a 0.5% additional return as well as reducing the risk and volatility if we rebalance our portfolio. If we remember what we said about the magic of compound interest in previous articles, this modest 0.5% could become almost 12,000 € after 20 years (investing 100,000 €).
We periodically review our client’s diversified portfolios in order to rebalance them.
This process involves determination especially when there is extreme market volatility as it means to go against the market. However, it is a very logical process because we will buy cheap and sell at higher prices facing the financial psychology that most times drives us to do the opposite.
By applying this process other elements like taxes and transaction costs play an important role.
In addition, it is essential to combine the benefits obtained from rebalancing with the additional costs incurred in the buying and selling process.
However, it is even more important to take taxation into consideration. There is also the combination of anticipating losses and getting “tax credits” to reduce our tax bill in the process of rebalancing.
Our diversified portfolios are an excellent way to start if you are willing to start making your first steps in the world of investments.
Know your investment profile and start investing with us as soon as possible. Time is the best ally of disciplined investors.
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