If you are investing directly, you should be aware that rebalancing your portfolio is similar to personalizing it based on your specific goals. Buying and holding is a common trading strategy that can be used for a short or long period. If this is the case, then based on the flow of your income, you can invest in various asset classes regularly. You must consider the ‘risks and returns’ component of your portfolio and alter it accordingly.
Why is it required?
It’s important to react to how your portfolio is performing to avoid any deviation from your original goal. Every investor has personal objectives to meet so they can invest a certain percentage of their money in each asset type. You may not be able to achieve your own goals if your portfolio deviates from your predetermined objectives. Maintaining a system that matches your risk appetite, return expectation, and other factors is what rebalancing is all about. The bond investment provides better stability to your portfolio along with reasonable returns than any other option. So, putting your money in bonds can be a part of your rebalancing strategy.
How does it work?
The first stage is to determine how much of each asset class should be in your portfolio. This is done as per objectives, such as necessary returns, investment time, and risk tolerance. You must examine your existing portfolio to see how far it has deviated from your initial asset allocation plan. Take a methodical approach to determine which asset classes should be reduced in proportion and which should be expanded, and then make buy and sell decisions based on your findings. The advice here is to buy corporate bonds having a maturity that matches your financial goals. There are some bond categories for which you don’t have to pay income taxes. So keeping them in your portfolio can stabilize it.
- Rebalance based on market movement:
People who invest more in stocks and less in bonds usually have to continuously indulge themselves in rebalancing their portfolios. As the market falls, they increase the proportion of stocks, and as the market rises, they begin to sell. However, buying bonds can save not only your time but also the efforts you put into the rebalancing process. Investing in bonds is a part of the risk minimization strategy, and you can avoid rebalancing based on the market movement.
- Rebalancing based on Risk:
Investors can rebalance the portfolio by changing the investment proportion to manage the risks. If you’re aiming for higher returns in a short period, then having a higher proportion of stocks and lower investment of bonds is apt. However, having a portfolio with a 60% and 40% proportion of stocks and bonds respectively can cushion the losses.
Hope you’re now aware of the benefits of bonds for your investment portfolio.
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