Rebalancing based on portfolio drift can maintain desired asset allocation from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
When constructing an investment portfolio, it is crucial to establish an initial asset allocation that aligns with your financial goals and risk tolerance. However, due to market fluctuations, the values of different asset classes within your portfolio may shift over time, resulting in a deviation from your desired allocation. This phenomenon is known as portfolio drift. Portfolio drift can have significant implications for your overall investment strategy. If left unchecked, it can lead to a misalignment between your portfolio's risk profile and your investment objectives. To address this issue, it is essential to periodically review your portfolio and rebalance it back to your target asset allocation. Rebalancing involves buying or selling assets within your portfolio to restore the desired mix of investments. By doing so, you can effectively realign your portfolio with your long-term financial goals and risk preferences. This process ensures that you maintain a consistent level of risk exposure and diversification, which are crucial elements of successful investing. Rebalancing based on portfolio drift is a proactive strategy that can help you avoid making impulsive investment decisions based on short-term market movements. Instead of chasing performance or succumbing to emotional reactions, you can rely on a disciplined approach to ensure that your portfolio remains in line with your original asset allocation.- You can stay on track towards achieving your financial objectives. This systematic approach to managing asset allocation can provide stability and consistency in your investment strategy, ultimately helping you navigate changing market conditions with confidence and resilience.
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