Rebalancing is the process of realigning the weightage of a portfolio of assets that involves buying or selling assets periodically to maintain a targeted level of asset allocation and risk.
What Is Rebalancing?
This process is critical during moments of financial instability to help individuals mitigate the risks of loss and depreciation of their digital assets. This not only prevents overexposure but also helps to instill good trading habits by building a certain discipline to stick to a long-term financial plan that allows the regular monitoring of anypk= potential market movements that could cause losses.
Most rebalancing strategies are time period-based, such as yearly, quarterly or monthly. They can also be reactionary, for example, based on allowable percentage compositions of assets, which is more cost-intensive. If the original target asset allocation was 50/50 among assets A and B and asset A performed well, it could have increased the weighting of the portfolio to 70%.
This means that an investor may sell some of A to buy more B to return to the original target allocation of 50/50. While the split does not need to be even among assets, rebalancing is most effective with a good mix of volatile and non-volatile holdings in the portfolio, as it safeguards investors from overexposure to undesirable risks.
In traditional finance, rebalancing is either done manually by the investor tracking through spreadsheets and buying/selling through exchanges/brokers or investing in funds where portfolio managers handle it.
Rebalancing in DeFi can be more advantageous as the process can be automated via smart contracts and doesn’t require you to monitor your portfolio and cross-check the value of your assets against the stock markets constantly. This allows users to distribute their gains across their assets while allowing the portfolio to retain a net positive gain.
Author Bio: Hisham Khan, CEO of Aldrin
Hisham Khan comes from a decade-long background in managing and building robust and innovative financial and enterprise technology. With an extensive career at Bloomberg and based in New York, Hisham has worked as a project manager with some of the world’s top engineers. It was here where he discovered the transformative impact of cryptocurrencies, and has since left Bloomberg to build comprehensive and accessible trading tools through Aldrin. His core mission is to make advanced crypto trading and strategy development available for everyone.