Effective Rebalancing Strategies

Hard Investment Policy And Allocation Rebalancing

Investors often face the challenge of maintaining their desired asset allocation as market conditions change over time. To illustrate this, consider an investor with an initial target asset allocation of 60% equities and 40% fixed income. Due to a significant rally in equity markets, the value of the equity portion increases to 70% of the total portfolio. To restore the original allocation, the investor needs to decide how to adjust their holdings. Which of the following methods is considered the most effective and commonly used strategy for rebalancing this portfolio?

Rebalance by strategically selling equities to buy fixed income at regular intervals, regardless of market conditions.

Rebalance by periodically assessing the asset allocation and only adjusting if the deviation from the target allocation exceeds a predetermined threshold.

Rebalance by buying more equities when their price decreases, leveraging market timing for optimal reallocation.

Hint

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