What Is Rebalancing?
What is rebalancing? Rebalancing, also known as rebalancing portfolio or portfolio rebalancing, is a procedure to realign an asset portfolio’s weightage, systematically considering selling or purchasing assets to keep a specified risk scale and asset allocation. Through this process, the investors can be assisted in dealing with the downside hazards while still taking part in a significant portion of the upside.
The process of rebalancing is considered to be crucial during times of fluctuation to assist people in alleviating the hazards related to losses and the decline witnessed in the value of their digital assets. In this way, not just overexposure is minimized. However, assistance is additionally provided to inculcate decent trading behaviors by constructing a definite discipline to keep to a durable financial strategy that permits the routine-wise observation of any likely movements to take place in the market (and can bring about losses).
Most of the rebalancing methodologies are based on a specific span in time, like monthly, quarterly, or yearly. Another type is reactionary, for instance, based on the permissible proportion of asset compositions, which requires higher costs. If the primarily aimed allocation is 50/50 between the two assets – for example, type A and type B – where A did a great performance, growth could have been incorporated by it in the portfolio’s weighting to place it at 70%. After that, the investor may trade some of the assets he possessed in A and purchase some in the B category to take the respective portfolio back to where it was previously standing.
In conventional finance, the process of rebalancing is either carried out manually on behalf of the investor by tracking the spreadsheets as well as selling/purchasing via brokers/exchanges or investing in those funds where the portfolio managers can handle it.
Cons Of Rebalancing
A disadvantage of rebalancing a crypto portfolio is that you can take profit before the asset finishes its bull run. This is inevitable in the act of rebalancing because you never know when the investment will rise in value or when it will stop rising in value. Another disadvantage of portfolio rebalancing is that it requires attention because, obviously, you will need to dedicate your attention to managing your assets to know when to buy or sell and when to remove an asset entirely from your portfolio.
The Working of Rebalancing and Its Benefits
In the first place, rebalancing the portfolio provides safety to the investor from straight exposure to some unwanted hazards. Subsequently, the rebalancing procedure guarantees that the portfolio exposures do not move out of the expertise zone of the manager. It is frequently seen that the very decisions are made to ensure that the extent of hazard posed is at the investor’s desired level. While there can occur a variation in the performance of stocks to additionally dramatic levels as compared with the bonds, the proportion of assets linked to stocks gets modified with evolving market conditions. In addition to the performance variable, the investors can make an adjustment in the overall risk factor related to the portfolios to tackle the shifting financial requirements.
In the decentralized finance (DeFi sector, several rebalancing benefits can be availed as the respective process can be turned into an automatic one through smart contracts with no requirement of monitoring the cryptocurrency portfolio or cross-checking the assets’ value simultaneously to the stock markets regularly. Implementing rebalancing techniques in an automated environment through smart contracts can offer massive benefits to both parties at any point. Of it all, one main advantage is that users can distribute their profits across crypto assets, permitting the portfolio to preserve a net positive profit.