What is the difference between rebalancing and asset allocation?

What is the difference between rebalancing and asset allocation?

Asset allocation refers to how you distribute your investments across different asset classes, like stocks, bonds, and cash. Rebalancing, on the other hand, is the process of realigning your portfolio back to your original asset allocation after it has changed due to market movements.

Why is rebalancing important?

Rebalancing is important because it helps maintain your desired risk level. Over time, some investments may grow faster than others, leading to an unbalanced portfolio that could expose you to more risk than you intended.

How often should I rebalance my portfolio?

It depends on your investment strategy, but many investors rebalance quarterly or annually. Some prefer to rebalance when their asset allocation deviates by a certain percentage.

Can I automate the rebalancing process?

Yes, many investment platforms offer automated rebalancing features that can help you maintain your target asset allocation without manual intervention.

What are the costs associated with rebalancing?

Costs can include transaction fees, tax implications from selling assets, and potential missed opportunities if the market moves favorably after you rebalance.