We previously demonstrated that stock indices exhibit mean-reverting property in the short term and trending property in the long term. Reference [1] further explored the trending/mean-reverting properties in a longer timeframe and pointed out that in the very long term, the markets mean-revert, We provide further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). Our results bolster Black’s intuition that prices tend to be off roughly by a factor of 2, and take years to equilibrate. The story behind these results fits well with the existence of two types of behaviour in financial markets: “chartists”, who act as trend followers, and “fundamentalists”, who set in when the price is clearly out of line. Mean-reversion is a self-correcting mechanism, tempering (albeit only weakly) the exuberance of financial markets. Such trending/mean-reverting properties exist not only in equity indices but also in bonds, FX, and commodity markets. The article concluded, …we have provided some further evidence that markets trend on the medium term (months) and mean-revert on the long term (several years). This dovetails with Black’s intuition that prices tend to be off by a factor of two: it takes roughly six years for the price of an asset with 20 % annual volatility to vary by 50 %. As a result, the authors recommended diversifying investment strategies, i.e. mixing trending and mean-reverting strategies. This is indeed a common practice in the industry, From a very practical point of view, our results suggest that universal trend following strategies should be supplemented by universal “value” strategies that mean-revert on long term returns. As is well known, trend following strategies offer a hedge against market drawdowns; value strategies offer a hedge against over-exploited trends. As a consequence, we find that mixing both strategies significantly improves the profitability of the resulting portfolios. References [1] J. P. Bouchaud, S. Ciliberti, Y. Lempérière, A. Majewski, P. Seager, K. Sin Ronia, Black was right: Price is within a factor 2 of Value, arXiv:1711.04717 Article Source Here: Further on Trending/Mean-Reverting Properties of Stock Indices
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In any decision-making process, bias can be significantly critical. Simply put, it is an irrational prejudice towards a specific factor. For most individuals, these include tendencies to make decisions without critical thinking or consideration. There are several biases that individuals may face during their decisions. One such bias consists of the availability bias. What is the Availability Bias?Availability bias is a type of heuristic that individuals face during their decisions. This bias involves the tendency to prefer readily available information. It also includes the inclination to use information that comes to an individual's mind quickly and easily. Another name used for the availability bias is the availability heuristic. Availability bias can hamper an individual’s critical thinking skills and result in wrong decisions. It results from mental shortcuts that individuals develop over time. When individuals rely on information that they can readily think of, it is known as availability bias. It may also relate to recency bias as it is common for individuals to recall recent information. How does Availability Bias work?When considering various options, it is common for the mind to rely on mental shortcuts to make quick decisions. Usually, individuals rely on historical information from their memory to make such decisions. Whenever someone thinks of a situation, they may get a sudden thought related to it. In these cases, they are more likely to allow this thought to influence their decisions. When individuals put reliance on the information that is readily available to them, it cultivates availability bias. Usually, individuals are likely to give more preference to this information and overestimate its importance. It is also possible that they think of such events repeating in the future are high. In reality, however, such circumstances may not occur, which will impact their decision-making. For example, an investor considers investing in two different stocks. The first stock relates to the technology industry. As soon as the investor thinks of this stock, they recall a previous bad experience with similar investments. The second stock relates to the finance sector. However, the investor does not have any information related to it. Due to availability bias, the investor is likely to prefer investing in the second stock. How can the Availability Bias influence decision-making?The availability bias may have several unfavourable impacts on an individual's decision-making process. In essence, it leads individuals into making wrong decisions, which will have adverse outcomes. Since availability bias relies on information that individuals can easily recall, it is insufficient to make decisions. The lack of sufficient information can lead to low-quality judgments. How to avoid the Availability Bias?The availability bias stems from mental shortcuts that help individuals make quick decisions. However, these shortcuts do not provide the best background for decision-making. While it is crucial to understand how this bias works to avoid it, it is not sufficient to eliminate it. Usually, the availability bias may stem from several mental shortcuts going off at the same time. Individuals must always consider all factors when making a decision. Through critical thinking and proper consideration, individuals can avoid this bias. However, this process may not be as straightforward. Individuals overly involved in a specific event are also likely to have information related to that event readily available. Therefore, distancing oneself from the decision-making process for a period may also be beneficial. ConclusionBiases are common in decision-making. Availability bias is a bias in which individuals put reliance on information that readily comes to their mind. This bias can hamper an individual’s decision-making ability and result in wrong decisions. However, it is possible to avoid it. With critical thinking and proper consideration, individuals can combat availability bias. Post Source Here: What is Availability Bias? When making decisions, individuals may come across various biases or heuristics. These biases can impact their decisions adversely. Usually, biases stem from pre-existing beliefs or how individuals perceive information. These biases may also have an impact on financial decisions. One such bias that may exist in finance is the framing bias. What is the Framing Bias?The framing bias stems from the information that individuals use to make decisions. By highlighting specific features of the presented information, individuals may perceive it differently. In other words, the framing bias comes from how an individual's decision may get influenced by how information gets presented to them. Framing bias, also known as the framing effect, can influence individuals' decisions differently for identical scenarios. It may occur when decision-makers choose varying solutions for similar or identical problems. The only difference between both scenarios is the way the information gets presented to them. By doing so, the framing bias can significantly impact the decisions that individuals make in various circumstances. How does the Framing Bias work?Framing bias primarily relates to how individuals perceive information. This perception usually depends on how this information gets presented to them. For the same information presented differently, individuals may get differing insights. The framing bias can be significantly influential in any decision-making process. It can also help manipulate individuals’ perceptions of information by altering its presentation. The framing bias may also relate to anchoring bias, which is when individuals put over-reliance on the first piece of information they receive. As both of these relate to how individuals perceive any information presented to them, they can influence each other. It may also relate to the status-quo bias, where individuals are likely to prefer default options compared to a different choice. What is the Framing Bias in finance?As mentioned, the framing bias also applies to investors and other financial decision-makers. Most investors come across various decisions during their activities. Similarly, they also consider several investments before choosing the best option. Sometimes, however, their perception of information may differ based on several factors. This variation in opinion constitutes framing bias. For example, an investor considers two stocks for investing. The information presented for the first stock states that the investor has a 60% chance of making a loss. The second one shows that the investor has a 40% chance of making a profit. While both have similar probabilities, the investor is likely to consider both options differently due to framing bias. In this case, the investor will choose the second option as the first one presents a high loss percentage. How to avoid Framing Bias?Like any other bias or heuristic that may exist, framing bias is also avoidable. Individuals must understand what this bias is and be aware of its existence. By doing so, they can identify any instances where they may allow the presentation of information to impact their decisions. However, there are also other methods that individuals can use to protect against framing bias. Individuals that make choices can also avoid framing bias by being aware of their decisions. The more information they have about those decisions, the more likely they are to mitigate framing bias. Giving more thought to each decision can significantly help them make well-informed choices. Similarly, individuals can consider the logic for each decision they make to avoid framing bias. ConclusionBiases or heuristics may exist in all areas for decision-makes. Framing bias is when individuals allow the presentation of their information to influence their decisions. In other words, it relates to how individuals get presented with information and how they perceive it. It is possible to avoid framing bias through awareness and other methods listed above. Originally Published Here: What is Framing Bias? What is a Sovereign Wealth Fund?A sovereign wealth fund represents a pool of funds owned by governments. These funds usually include any surplus reserves that countries accumulate over a period. The government may consist of both central and sub-national governments. Sovereign wealth funds include investments in foreign financial assets that follow a specific financial objective. Usually, this objective requires the highest returns possible. There are several sources that government may use to finance sovereign wealth funds. These include trade surpluses, bank reserves, unutilized government budget funds, government transfer payments, receipts from resource exports, etc. However, sovereign wealth funds do not include every fund owned by governments. Therefore, public pension funds, central bank reserves, state-owned enterprises, etc., are not a part of it. How does a Sovereign Wealth Fund work?Sovereign wealth funds primarily include funds owned by the federal or national government. As mentioned, these funds may accumulate from various sources. When a government has surplus funds that it doesn't have other uses for, it may use them as sovereign wealth funds. These funds then use those reserves to invest in various asset classes, including stocks, bonds, commodities, etc. For most governments, sovereign wealth funds include a specific purpose that they aim to achieve. As mentioned, most of the time, it will consist of maximizing the returns from investments. These funds act similar to other prevalent investments funds. Therefore, they have similar characteristics, such as risk tolerance levels, time horizons, liquidity concerns, etc. What are the objectives of a Sovereign Wealth Fund?There are several objectives that sovereign wealth funds may help governments achieve. Often, these may include protecting a nation's economy from any volatility that comes from trades. Some governments may also use it to fund their country's social and economic development. In some cases, governments may also use these funds to build funds for future use. Sovereign wealth funds may also have other objectives. Overall, it is a part of a government’s political strategy. It can act as a sustainable long-term capital source for most countries. For nations involved in non-renewable commodity exports, sovereign wealth funds can be an option towards diversification. With these funds, governments aim to generate long-term returns that can benefit a country's economy. What are the advantages and disadvantages of Sovereign Wealth Funds?Sovereign wealth funds can have many advantages for a country. In most cases, it can help strengthen a nation's economy in times of economic downturns. Therefore, it can be beneficial in countering recession or development in a country. Sovereign wealth funds can also provide governments with an alternative income source. For countries where taxation is not enough to meet developing needs, these funds can be significantly impactful. However, sovereign wealth funds do not guarantee income. That is a feature that is similar to any other investment fund. On top of that, how governments manage these funds can also play a substantial role in their performance. In some cases, governments may mismanage these funds and cause more harm than good. This mismanagement may also stem from a lack of transparency in governments. ConclusionSovereign wealth funds are funds owned and controlled by governments rather than institutional or individual investors. Governments may use several sources to finance these funds. Usually, there are many objectives that governments can achieve by using these funds. Sovereign wealth funds can be significantly beneficial for most nations. However, they may also have some drawbacks. Article Source Here: What is a Sovereign Wealth Fund? Investors need a diversified portfolio to mitigate any risks that come with their investments. During this process, they can use several techniques or approaches. Traditionally, most investors make decisions based on their objectives. However, investors can also build a portfolio based on their risk appetite. One approach they can use during this process is risk parity. What is Risk Parity?Risk parity is a strategy that investors use when constructing their portfolios. Using this approach, investors first evaluate their risks by considering several factors. For that, investors need to use the risk contribution for each asset class in relation to the overall portfolio. After that, they can establish how to allocate funds across the several asset classes in their investment portfolio. The risk parity approach to building a portfolio relates to the Modern Portfolio Theory (MPT). MPT seeks to explain a method that investors can use to develop a diversified portfolio. This portfolio focuses on maximizing the expected returns that investors can get for a specific market risk level. Risk parity uses a similar approach by diversifying a portfolio into several asset classes based on the risks and returns of the whole portfolio. How does Risk Parity work?Risk parity is a portfolio management strategy that investors can use for their portfolios. It depends on leverage to help investors diversify the risks associated with their investment portfolios. It also focuses on maintaining returns at an expected level in the long run. By allowing investors to incorporate leverage, risk parity helps investors reduce their risks to achieve equity-like returns. Risk parity focuses on leveraging a portfolio to allocate more funds towards lower-risk assets. Using this approach, we seek to deliver higher returns than investing in higher-risk assets. It also goes against other traditional asset allocation strategies. Unlike those strategies, risk parity focuses on more investments in bonds compared to stocks or equities. By doing so, risk parity ensures that investors receive similar returns from both their equity and debt investments. However, investors usually consider their risks and return levels before making these decisions. It also goes against other asset allocation strategies that use a fixed or predetermined mix for both asset classes. What are the advantages and disadvantages of Risk Parity?Risk parity can be a significantly beneficial strategy for investors as it helps them minimize their returns while minimizing risks. Unlike some other traditional asset allocation strategies, risk parity considers investors' risk and return levels. By doing so, investors can identify their specific risk level and divide it across their overall portfolio to achieve better diversification. There are several other tools that can also help investors with their objectives. One such tool is the security market line that is a graphical representation of risks and returns. By allowing investors to use leverage, risk parity can help equalize the volatility and risks that investors undertake in their portfolios. However, there are some limitations that this strategy includes. Some experts believe that using volatility as a basis for asset allocation does not represent an appropriate risk measure. It may also leverage low-risk assets to counterbalance the risks that investors undertake with other asset classes. In some instances, it may cause a portfolio imbalance. ConclusionThere are several approaches to constructing and managing portfolios. Risk parity is a strategy that allows investors to evaluate their risks when building their investment portfolio. It aims to achieve lower risks at higher returns. There are several advantages of using this strategy. However, it may also come with some drawbacks, as mentioned above.
Article Source Here: What is Risk Parity? Building a portfolio can be a significantly challenging task for investors. Most investors only consider stock and bond investments when constructing their portfolios. This approach has historically been a safe option for investors. While it increased the rewards they received, it also provided them with a safety net for when they suffered losses. However, it is also difficult for investors to establish an optimal mix for stocks and bonds in their portfolios. Several factors play a substantial role in what this mix should be. For example, it may depend on the investor's risk tolerance level, age, experience level, etc. Investors can also use common heuristics to establish a balanced portfolio. One such rule is the 60/40 stock to bond allocation rule. What is 60/40 Stock to Bond Allocation?The 60/40 stock to bond allocation rule is straightforward. When establishing a balanced portfolio, investors can use this rule to split their investments. As the name suggests, using this approach, investors must divide their portfolios into 60% stocks and 40% bonds. This approach to investing has been significantly successful historically. However, it has also had its fair share of drawbacks. A 60/40 stock to bond allocation portfolio constitutes a high-risk portfolio. Usually, investors include 60% of stocks in their portfolios for growth. However, they also hold 40%bonds and other fixed-income securities to mitigate any specific risk. Investors usually include bonds and securities that can lower the risks associated with their particular stock investments. How does the 60/40 Stock to Bond Allocation work?The 60/40 stock to bond allocation technique is an approach towards determining a portfolio mix. Unlike other methods, it has a fixed ratio for allocating investments in a portfolio. As mentioned, it works by using a 60% allocation for stocks or equity instruments. The remaining percentage, 40%, goes towards bonds and other fixed-income instruments. For example, an investor wants to allocate a portfolio of $10,000 into different asset classes. They settle at using the 60/40 stock to bond allocation technique. Using this approach, they buy stocks worth $6,000 to include in their portfolio. For the remaining amount, $4,000, they acquire various corporation and municipality bonds. Using the 60/40 stock to bond allocation technique can be helpful. However, there are several factors that play a role in whether investors will use this ratio. Usually, they take a risk assessment to determine whether this technique can help them with their risks. In some cases, they may also opt for a different split, such as 50/50 or 40/60 stock to bond allocation. Is the 60/40 Stock to Bond Allocation beneficial?The 60/40 stock to bond allocation technique has been one of the favourites splits for investors. Historically, it was a preferred method for investors to distribute their funds. It can be beneficial in providing investors with protection during market or economic downturns. Similarly, it can also help them increase their returns and achieve growth. In recent years, however, the 60/40 stock to bond allocation technique has illustrated various drawbacks. In particular, the low or slow return that investors get from their debt instruments is critical with this technique. For most investors, the optimal portfolio split ultimately comes down to their circumstances. ConclusionThere are several techniques that investors can use when establishing a balanced portfolio. The 60/40 stock to bond allocation technique helps investors split their portfolios into stocks and bonds. With this approach, investors include 60% stocks and 40% bonds in their portfolios. While it can be beneficial, the 60/40 stock to bond allocation split has become outdated. Originally Published Here: 60/40 Stock to Bond Allocation Asset allocation is a technique that helps investors distribute their portfolios into several asset classes. By doing so, it can mitigate any risks associated with a market. There are several approaches to asset allocation that investors can use. In essence, however, it involves establishing an asset mix and distributing investments accordingly. However, establishing an asset mix may not be as simple. Usually, investors need to contemplate what split will maximize their returns while also minimizing their risks. This split will depend on investors' risk tolerance levels, time horizons, etc. However, investors can also use some rules of thumb that may help them establish an optimal portfolio mix. One such rule is the 120 minus your age rule. What is the 120 Minus Your Age Rule?Historically, investors have preferred the 100 minus your age rule when establishing a portfolio mix in asset allocation. Using this rule, investors subtracted their age from 100. The residual amount represented the percentage of stocks that investors must include in their portfolio mix. The remainder amount was the percentage they should invest in bonds and other securities. However, the 100 minus your age rule was not as effective in diversifying a portfolio. On top of that, it took a conservative approach towards investing. Therefore, investors can use the 120 minus your age rule to get better results. This rule is also similar to the 100 minus your age rule. However, instead of subtracting an investor’s age from 100, they deduct it from 120. How does the 120 Minus Your Age Rule work?The 120 minus your age rule works similarly to the 100 minus your age rule. With this approach, investors subtract their age from the number 120. The residual amount represents the percentage of their portfolio that must include investment in stocks. The remaining portion will consist of bonds or other securities. This rule can be significantly helpful in asset allocation. For example, an investor aged 25 wants to establish the percentage of their portfolio that must constitute stocks. Using the 100 minus your age rule, the investor must include 75% (100 - 25) stocks in their portfolio. However, with the 120 minus your age rule, their portfolio must consist of at least 95% (120 - 25) of stocks. Using this rule, they can take more risks and drive their bar up by 20%. Does the 120 Minus Your Age Rule work?The 120 minus your age rule is a rule of thumb or, simply, a heuristic. It can be helpful for confused investors who want to establish a portfolio mix. However, it is not a scientific or proved approach towards success. It only serves to provide investors with a base using which they can develop their own optimal mix. The effectiveness of such rules also depends on other factors. For example, while investors can use it to establish their portfolio mix, their success will come from the stocks they choose. For example, an investor includes 90% of stocks in their portfolio. However, if they invest in relatively low-risk stocks, their rewards will be lower. ConclusionAsset allocation can be a great tool for establishing a diversified portfolio. However, it may be difficult for investors to determine an optimal portfolio mix. Using the 120 minus your age rule, they can establish the percentage of stocks they must include in their portfolio. While it can be significantly helpful, its success depends on how investors use it. Originally Published Here: 120 Minus Your Age Rule We previously discussed implied dividend yield and how to extract it from traded financial instruments. Given that dividend is considered a cash payment the shareholder receives when holding a stock, naturally one would think that dividend yield can only be zero or positive. We recently, however, worked with a client whose implied dividend yield is negative. What does this mean? In most of the equity derivative pricing models, the number of outstanding shares is treated as a constant. Reference [1], however, incorporated the number of shares as a variable within the context of dilution and stock buyback. It pointed out that stock buyback is viewed as providing a synthetic positive dividend yield, whereas dilution provides a synthetic negative dividend yield. Our paper is one of the first to provide a theoretical link between payout policy and the pricing of listed derivatives. We have seen that dilutions can be viewed as synthetic negative dividends and buybacks as synthetic positive dividends. Options on equity are dilution protected, and for highly levered firms, they may be more valuable than equity itself. We have seen that dilutions and buybacks can cause the stock price distribution to dramatically depart from the shape of the equity distribution, and that prices of stock-based claims can, therefore, differ from prices of claims based on total equity. That explains why we obtained an implied negative dividend for our client. They are an airline that suffered economic losses during the pandemic and needed to raise working capital by issuing a convertible bond through a private placement. The conversion of the convertible bond would dilute the outstanding shares up to 13%, which is a large number. The article also established a relationship between the dilution effect and leverage of a firm. Dilution has a smaller effect in low-leverage firms than in high-leverage ones. For low leverage, there are few dilutions and the percentage differences are very small, except at very low strikes. The difference increases with leverage, as large coupon payments cause more dilution, making call stock options cheaper and put stock options more expensive relative to their equity counterparts. References [1] Backwell, Alex and McWalter, Thomas and Ritchken, Peter H., On Buybacks, Dilutions, Dividends, and the Pricing of Stock-Based Claims (2019). https://ssrn.com/abstract=3422692 Originally Published Here: Can Dividend Yield Be Negative? Asset allocation has long been one of the favourite tools for investors that want a diversified portfolio. With this technique, investors can divide their investments into various asset classes. These asset classes have different markets and characteristics. It limits investors' losses when one of the markets in which they own assets goes into a downfall. Asset allocation can be significantly helpful for investors. However, the traditional approach to this technique may not be as effective for every investor. There are several other variations of asset allocation that allow investors to customize their portfolios accordingly. One such approach that is relatively uncommon is liability-relative asset allocation. What is Liability-Relative Asset Allocation?With the traditional asset allocation approach, investors divide their portfolios into various asset classes. Usually, they have an objective based on which they allocate their investments into a specific portfolio mix. However, some investors may want to focus their asset allocation approach based on their liabilities. This approach is most common among pension funds or insurance agencies. With liability-relative asset allocation, investors can manage their assets to reduce any risks associated with failure to repay liabilities. Usually, pension fund managers use it to choose assets that meet the objectives set to meet their liabilities. Another name used for liability-relative asset allocation is asset-liability management. It goes against the traditional asset-only strategic allocation techniques. With Liability-relative asset allocation, investors can consider both their assets and liabilities. Usually, they net both of these to calculate whether they have a surplus or deficit of assets. With this approach, investors aim to manage their surplus or deficit to ensure they have enough assets to pay off future obligations. Therefore, they usually incorporate liabilities as a separate asset class when considering the portfolio mix. How does Liability-Relative Asset Allocation work?As mentioned, liability-relative asset allocation is prevalent among pension funds. These funds have liabilities that they need to pay off in the future. Liability-relative asset allocation works by defining the liabilities first. These liabilities dictate the asset allocation ratio used by these funds. It, in turn, influences the risks needed to support these liabilities. Pension fund managers also need to consider the time value of money when estimating their liabilities. Therefore, they use the present value of all their obligations. Once they determine those, managers can establish a funding ratio. Based on this ratio, they can divide their assets into various asset classes. On top of this, the surplus or deficit calculated by the manager will also impact the asset allocation used. Overall, with the liability-relative asset allocation approach, managers can hedge the risks associated with their funds. Therefore, it involves building a portfolio that recognizes those risks and reacting to them accordingly. Managers use their identified risks to decide on the assets they want to include in their portfolios. As mentioned, these assets need to correlate with the fund's liabilities for liability-relative asset allocation to be effective. ConclusionLiability-relative asset allocation is a variation of the traditional asset allocation technique to investing. It is most prevalent among pension funds and insurance companies. Using this approach, fund managers must first identify their liabilities. Once they do so, they identify assets that can help the fund in meeting its obligations. Overall, it allows managers to hedge the risks associated with their funds. Post Source Here: Liability-Relative Asset Allocation Diversification in a portfolio is crucial for investors. It can not only help them reduce their risks but can also increase their returns. There are several strategies that can help them achieve this goal. Most simply, investors can diversify within their asset class. However, that does not reduce their exposure to specific risks. For that, investors may need to use an asset allocation strategy. What is Asset Allocation?Asset allocation is an investment strategy through which investors include investments from several asset classes in their portfolios. This strategy is highly beneficial for protecting investors against unsystematic risks that are specific to an asset class. Usually, investors may divide their investments into equities, fixed-income instruments, or cash and cash equivalents. Investors need to employ an asset allocation that caters to their needs. For that, they need to determine a portfolio mix. This mix establishes the division of their funds into different asset classes. Over time, each investment will earn varying returns. Therefore, the weighted mix of each asset class may differ after a specific time. In these cases, investors will need to consider rebalancing their portfolios. What is Rebalancing a Portfolio?As mentioned, investors will establish a portfolio mix that defines how much they invest in each asset class. In some cases, however, this mix may change over time. Therefore, investors will need to rebalance their portfolios. Rebalancing a portfolio is a process that allows investors to buy or sell assets within their portfolio to revert to their original portfolio mix. Rebalancing a portfolio is crucial for investors to stick to their intended portfolio mix. The portfolio mix does not change due to changes in the assets within a portfolio only. Investors can also rebalance their portfolios when their risk tolerance levels or overall investment strategy changes. Due to any of these reasons, investors may choose to rebalance their portfolios. How does Rebalancing a Portfolio work?Portfolio rebalancing allows investors to restructure their portfolios due to any of the reasons stated above. It is a part of the asset allocation strategy that investors use to protect themselves through diversification. Usually, investors have a defined portfolio mix that is a part of this strategy. However, when this mix changes, investors will need to reestablish the original mix. For that, investors need to work out which asset classes exceed their required limit. Once they do so, they will sell enough assets from that class to revert to the required limit. Similarly, they can also identify asset classes that are below the expected weight. For these classes, investors will buy more assets to raise the mix to the required limit. What is the importance of Rebalancing a Portfolio?Investors can get several benefits by rebalancing their portfolios. Asset allocation strategy primarily focuses on diversifying investors' risks. For that, their portfolio must include an optimal mix of assets from various asset classes. Portfolio rebalancing can help them reestablish that mix when things change. Portfolio rebalancing can help investors reduce their portfolio risks. Investors can either use this strategy after a specific time interval or when their portfolio becomes unbalanced. It also compels investors to sell their investments when they are at a high point and buy low ones. In the long run, portfolio rebalancing helps investors focus on long-term goals. ConclusionAsset allocation is an investment strategy that allows investors to diversify their portfolios. It does so by dividing their portfolios into various asset classes established through a mix. However, this mix may change due to various reasons. For that reason, investors will need to rebalance their portfolios. Portfolio rebalancing is a technique used by investors to bring their portfolios back to their established portfolio mix. Post Source Here: What is Rebalancing a Portfolio? |
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