03 August 2011

A Diagram that I think Portfolio Rebalancing Should be Like

When we set a target return, then we normally form up a risk & return characteristic for the portfolio and look for the optimum risk & return. In individual investor point of view, the longer time horizon that we have, the higher possible return we should seek to. In Mean Reversion Theory, as long as the you stay in the investment, your return should be revert back to the mean level of the entire market. It is true for the majority of the investors, so if we are 'average investor', then we should make use of the theory above and try to perform a good portfolio rebalancing strategy. You can look at the graph below:

 

Call out A: The long term Required Return. The steeper the line is, the more volatile it could be.



Call out B: There are two major directions in the market except the sideline. So when the market in the uptrend, what you can do is to get ready to liquidate your investment. You could do this when the return is outperform the long term required return for several times depending on your required return.

Call out C: When your return underperformed the long term required return rate for several times, you should invest it more as compared to when the return is outperform the long term required return rate.

Of course, above is just my opinion as above illustration suits to my risk & return characteristic. I will not be panic when market drops dramatically, instead I becomes excited when market is in the bear market and I become more worried when market moves up faster than what I expected.

What is your comment? Please share with us here.

3 comments:

  1. Please leave me your comments here. :)

    ReplyDelete
  2. pls improve your english writing skills

    ReplyDelete
    Replies
    1. Thanks for your comments. I will double check my grammar mistakes. Please allow me to keep on improving my English Writing Skills, as I believe I can beef up my English once I practice it more.

      Delete

Related Posts Plugin for WordPress, Blogger...

View All My Posts Here