Investments, like plants and children, need attention to grow – this means monitoring and rebalancing your portfolio.
Investors want to avoid having “all their eggs in one basket”, but sometimes market activity sees your money lean too heavily into one area, or too light in another. Conditions change from the confines of your investment policy statement, but there are ways to stick to that plan.
Buying or selling assets to rebalance a portfolio keeps an investor from being too exposed to their policy’s conditions, be it a company’s market cap, the sector’s performance, or industry at large.
To keep balanced, investors sell a portion of their better assets to buy more of the underperformers. Essentially putting an investment that did well to boost another that will do well.
How monitoring and rebalancing works
The parameters of the investment policy are a gauge of risk tolerance versus desire for reward. To make sure their investment portfolio keeps its desired asset allocation over time, investors will keep it from becoming too heavy in a particular asset class. If you don’t trim the fat, you run the risk of taking on risks like being affected by market fluctuations.
For example, you buy two stocks for $100, but in a year, one stock went up 50 per cent but the other went down 50 per cent.
Now you would have one $150 and one $50 stock and must decide if buying or selling will realign the percentages back to the original target allocation. Both stocks are still a worthy investment and the one on the decline could be a discount.
Know the risks of investing
There’s always the risk that this move is putting a dying stock on life support, or just having a larger share of a losing investment. Opinion varies among investors and traders about this strategy, but most would agree that finding the plan that works takes time, patience, and the humility to know when to readjust.
Look to brokerages or financial advisors
Brokers act as an intermediary between investors and a securities exchange. People need the services of exchange members since securities exchanges only accept orders from members of that exchange. This takes some research to find the platform best aligned with your investing goals.
Some of the most popular options in this space include:
- Questrade is an online brokerage firm and wealth management firm. It is Canada’s largest discount broker
- TD Direct Investing is an investment and trading platform from Canada’s largest online broker
- Qtrade Direct Investing is an online discount brokerage that offers stocks, bonds, options, GICs and new issues
- National Bank Direct Brokerage was the first broker of a Canadian bank to offer 100 per cent of Canadian and U.S. stocks, options, and ETFs with no fee
- RBC Direct Investing real-time streaming quotes for stocks and ETFs
An investor who doesn’t rebalance is an investor who likely won’t see profits
Fitness experts recommend total body workouts for the same reason – proportions need to be consistent for maximum results.
Monitoring and rebalancing investments offers a variety of benefits, like the potential for higher long-term returns, compared to cash and fixed income investments. It also offers the likelihood to earn dividends and capital gains.
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