How often should one consider portfolio rebalancing?

How often should one consider portfolio rebalancing?

• A. Once a year
• B. Whenever there is market volatility
• C. At least annually or when asset allocation deviates significantly
• D. Only when starting a new investment

Answer: (C)

Portfolio rebalancing is a crucial practice in financial planning to maintain an investor's desired asset allocation and risk profile over time. The correct choice highlights that rebalancing should occur at least annually or whenever the asset allocation deviates significantly from the intended targets. This approach ensures that an investor does not unintentionally become overexposed to certain assets, which may happen due to market fluctuations. For instance, if one asset class performs exceptionally well, it can lead to a disproportionately large share of the overall portfolio, increasing risk. By rebalancing, an investor can sell off some portions of the overperforming assets and reinvest in underperforming ones, realigning the portfolio with their strategic investment goals and risk tolerance. While annual rebalancing is a commonly recommended practice, being responsive to significant deviations in asset allocation is also vital. This proactive measure allows investors to adjust their portfolios in ways that can help manage risk and capitalize on market opportunities more effectively. The other options suggest more limited or infrequent strategies that may not adequately address changes in market conditions or appropriately maintain the desired asset mix. For example, only rebalancing when starting a new investment or solely during market volatility does not account for the ongoing nature of investment management and risk assessment that re

Portfolio rebalancing is a crucial practice in financial planning to maintain an investor's desired asset allocation and risk profile over time. The correct choice highlights that rebalancing should occur at least annually or whenever the asset allocation deviates significantly from the intended targets.

This approach ensures that an investor does not unintentionally become overexposed to certain assets, which may happen due to market fluctuations. For instance, if one asset class performs exceptionally well, it can lead to a disproportionately large share of the overall portfolio, increasing risk. By rebalancing, an investor can sell off some portions of the overperforming assets and reinvest in underperforming ones, realigning the portfolio with their strategic investment goals and risk tolerance.

While annual rebalancing is a commonly recommended practice, being responsive to significant deviations in asset allocation is also vital. This proactive measure allows investors to adjust their portfolios in ways that can help manage risk and capitalize on market opportunities more effectively.

The other options suggest more limited or infrequent strategies that may not adequately address changes in market conditions or appropriately maintain the desired asset mix. For example, only rebalancing when starting a new investment or solely during market volatility does not account for the ongoing nature of investment management and risk assessment that re