As the summer months approach, investors may experience a drop in trading activity and performance in their portfolios. Historically, August has been known for having lower trading levels, potentially leading to slower gains and prompting some investors to consider selling off their assets. However, rather than trying to time the market, experts recommend implementing a strategy called rebalancing.
Rebalancing involves periodically adjusting the allocation of assets in your portfolio to maintain the desired balance of risk and returns. As certain assets outperform others, rebalancing allows investors to sell high-performing assets and buy underperforming ones at a discount, essentially following the “buy low, sell high” principle. By rebalancing once or twice a year, investors can ensure that their portfolio remains diversified and aligned with their investment goals.
Research by Morningstar has shown the benefits of rebalancing over a long-term period. Despite market volatility, annual rebalancing has demonstrated similar performance to a buy-and-hold strategy while reducing overall risk. In contrast, investors who follow a buy-and-hold approach without rebalancing may be exposed to higher levels of risk, especially during market downturns. Additionally, daily rebalancing was found to be the most effective strategy, although it may not be practical for most investors due to the intensive monitoring required.
To incorporate rebalancing into their investment strategy, investors are advised to choose a specific date each year for rebalancing and stick to it. This approach eliminates the need to time the market, which can be challenging and often leads to subpar results. Studies have shown that the vast majority of professional investors underperform index funds over the long term, emphasizing the importance of a disciplined rebalancing strategy. By consistently rebalancing on a predetermined date, investors can avoid the pitfalls of trying to predict market movements and improve their overall portfolio performance.
Ultimately, following a disciplined approach to rebalancing can help investors navigate market volatility and achieve their long-term financial goals. By maintaining a diversified portfolio and periodically adjusting asset allocations, investors can capitalize on market opportunities while minimizing risk. Rather than succumbing to market hype or attempting to time the market, individuals can rely on proven strategies like rebalancing to optimize their investment returns and build wealth over time.
