B

y Vasyl Soloshchuk, CEO and Co-Owner at INSART

Our series of

WealthTech Cookbook

articles explores various wealth-management components, explaining the importance of each. In the previous part, we offered you an overview of the most popular rebalancing software on the market. Today we are covering the rebalancing concept, since the right blend of asset classes is essential to manage risk and perks to get long-term benefits.

Thus, rebalancing investment vehicles is a crucial strategy if you want to find balance between risk and returns.

Reasons why everyone should rebalance

To begin with, it’s not just a good strategy but a necessity to rebalance if you want to maintain a healthy risk-and-return balance. Rebalancing helps to:

  • Manage risk inside your portfolio, effectively removing guesswork;
  • Utilize buy-low and sell-high opportunities without emotion, using pure strategy;
  • Maintain a standard deviation (risk tolerance) aligned with the investment goals.

How do you deal with the risk-management part? By reducing underweighting or overweighting assets in a particular portfolio you can manage risk, taking into account the tendency of portfolios to become riskier with time if not rebalanced.

Usually, equities or companies’ stock (ETFs) prices tend to grow more often than, for example, the price of fixed-income assets such as corporate or government bonds, or bond mutual funds. And if ETFs rise, they do so to a greater extent compared to bonds.

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