21 July 2017

The Importance Of Rebalancing

Why is it important to rebalance your portfolio?

Assuming you bought your share at $1 which gave you 5% dividend yield. After few months, the stock went up to $2. 

What's your dividend yield now?

If you have followed through this blog, you would know that now the dividend yield becomes 2.5%. Simple math right?

So if you choose not to rebalance by selling partial or all of your shares, not only you wouldn't be able to grow your portfolio, you would only have paper gain of that $1 ($2-$1).

And certainly, market tends to be a "weighing machine" in the long run. Your $2 worth of shares might soon becomes $1.50 or even half of your initial purchased price, $0.50.

What should I do?

  • Rebalance it - You can choose to sell half or all of your shares at $2 and use the proceeds to buy another counter which gives you more than 5% dividend yields (Assuming your desire dividend yield is 5%)
  • Sell and wait - If there are no better opportunity, you can choose to sell at $2 (ultimately you already doubled your return, don't be greedy to wait till $3 or $4) and hold cash to wait for better opportunities.

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