Building a Profitable Portfolio #3

Step 3: Reassessing Portfolio Weightings

Once you have an established portfolio, you need to analyze and rebalance it periodically, because market movements may cause your initial weightings to change.

To assess your portfolio's actual asset allocation, quantitatively categorize the investments and determine their values' proportion to the whole.

The other factors that are likely to alter over time are your current financial situation, future needs and risk tolerance. If these things change, you may need to adjust your portfolio accordingly.

 

If your risk tolerance has dropped, you may need to reduce the amount of equities held.

Or perhaps you're now ready to take on greater risk and your asset allocation requires that a small proportion of your assets be held in riskier small-cap stocks.

To rebalance, determine which of your positions are over weighted and underweighted.

For example, say you are holding 30% of your current assets in small-cap equities, while your asset allocation suggests you should only have 15% of your assets in that class.

Rebalancing involves determining how much of this position you need to reduce and allocate to other classes.

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