Rebalancing

What Is Rebalancing?

Rebalancing is the process of adjusting the weightage of assets in a portfolio. This involves periodically buying or selling assets to maintain a desired level of asset allocation and manage risk. By rebalancing, investors can reduce downside risks while still benefiting from potential gains.

During times of financial instability, rebalancing becomes crucial in helping individuals safeguard their digital assets from loss and depreciation. It not only prevents overexposure but also fosters good trading habits by instilling discipline in adhering to a long-term financial plan. Regular monitoring of market movements is essential to identify potential risks and prevent losses.

Rebalancing strategies are often based on specific time periods, such as yearly, quarterly, or monthly. Alternatively, they can be reactive, depending on the allowable percentage compositions of assets. However, reactive strategies tend to be more costly. For instance, if the original target asset allocation was 50/50 between assets A and B, and asset A performed well, it could increase the portfolio’s weighting to 70%. In this scenario, an investor may sell some of asset A to buy more of asset B, returning the allocation to the original 50/50 target. While the distribution does not need to be equal among assets, rebalancing is most effective when the portfolio contains a mix of volatile and non-volatile holdings, as it protects investors from excessive exposure to undesirable risks.

In traditional finance, investors manually perform rebalancing by tracking their portfolios through spreadsheets and executing trades through exchanges or brokers. Alternatively, investors can opt to invest in funds where portfolio managers handle the rebalancing process.

Rebalancing in DeFi (Decentralized Finance) offers additional advantages as it can be automated through smart contracts. This eliminates the need for constant monitoring of the portfolio and cross-checking asset values against stock markets. Automated rebalancing enables users to distribute their gains across different assets while maintaining a net positive gain for the portfolio.

Author Bio: Hisham Khan, CEO of Aldrin

Hisham Khan has a decade-long background in managing and building robust and innovative financial and enterprise technology. With extensive experience at Bloomberg and based in New York, Hisham has worked as a project manager alongside top engineers. It was during this time that he recognized the transformative impact of cryptocurrencies, leading him to leave Bloomberg and establish Aldrin. His primary mission is to make advanced crypto trading and strategy development accessible to everyone through comprehensive trading tools.