Ongoing Portfolio Management

Ongoing Portfolio Management

3.1 Regular rebalancing

As explored earlier, rebalancing is an important risk management tool that keeps the risk of the portfolio at a level with which the client feels comfortable. Allowing risky assets to dominate over time inevitably increases the risk inherent in the portfolio. Rebalancing can be a tough path to follow, particularly at times of very strong, upward (or downward) market momentum, as it requires selling out of assets doing well and investing in assets that have done less well.

EBI research indicates that rebalancing to “tolerance bands” is preferable to not rebalancing or rebalancing based on set or random dates. In essence, portfolios should be rebalanced only when a group of assets held in the portfolio, collectively breach certain tolerance bands.