What is the primary purpose of systematic rebalancing in an investment portfolio?

What is the primary purpose of systematic rebalancing in an investment portfolio?

• A. To maximize returns
• B. To restore original asset allocation
• C. To minimize trading costs
• D. To track market trends

Answer: (B)

The primary purpose of systematic rebalancing in an investment portfolio is to restore the original asset allocation. Over time, as different investments within a portfolio perform variably, their proportionate values shift, potentially leading to a deviation from the intended asset allocation. For instance, if stocks outperform bonds, the proportion of stocks in the portfolio may grow, increasing the overall risk profile of the portfolio beyond the investor's risk tolerance or strategy. Systematic rebalancing involves periodically selling off portions of the overperforming asset classes and buying into underperformers to return to the desired asset allocation mix. This disciplined approach helps maintain the investor's intended level of risk and ensures that the investment strategy remains aligned with their financial goals. While maximizing returns, minimizing trading costs, or tracking market trends might be important considerations in investment strategy, they are not the primary focus of systematic rebalancing. Instead, the core objective is ensuring that the portfolio remains balanced according to the predetermined asset allocation plan, which is critical for managing risk effectively.

The primary purpose of systematic rebalancing in an investment portfolio is to restore the original asset allocation. Over time, as different investments within a portfolio perform variably, their proportionate values shift, potentially leading to a deviation from the intended asset allocation. For instance, if stocks outperform bonds, the proportion of stocks in the portfolio may grow, increasing the overall risk profile of the portfolio beyond the investor's risk tolerance or strategy.

Systematic rebalancing involves periodically selling off portions of the overperforming asset classes and buying into underperformers to return to the desired asset allocation mix. This disciplined approach helps maintain the investor's intended level of risk and ensures that the investment strategy remains aligned with their financial goals.

While maximizing returns, minimizing trading costs, or tracking market trends might be important considerations in investment strategy, they are not the primary focus of systematic rebalancing. Instead, the core objective is ensuring that the portfolio remains balanced according to the predetermined asset allocation plan, which is critical for managing risk effectively.