Rebalancing: what is it and why do we need it?
Financial markets are constantly changing. The crypto market is changing as well, but it has the most significant potential for both experienced investors and newcomers. However, finding and practicing effective strategies and methods requires a lot of time and money. But some tools have already been tested for years. One of them is rebalancing.
What is rebalancing?
Portfolio rebalancing is a simple method, however, it has been used in the traditional financial system for many years. If you track the development of rebalancing, then history leads us to 1950–1960 yy, when economists Harry Markowitz and William F. Sharpe developed a modern portfolio theory (MPT). It emphasizes the importance of diversifying and allocating assets to optimize portfolio returns at a given level of risk.
Rebalancing aims to restore the original proportions of assets in your portfolio. At the moment, this is one of the most effective ways to reduce risks, take advantage of market ups and downs and increase investment returns.
To understand this tool in practice, let’s take the following example. Imagine you have four cryptocurrencies in your portfolio: BTC, ETH, XRP and LTC, with equal weight, each asset has 25% in the portfolio. The goal of rebalancing is to return all assets to an equal number, as it was at the very beginning. Thus, each asset must return to its original proportions. If your portfolio is $100, then you would invest $25 in each of these four assets.
Over time, the prices of your assets may change, which will lead to a deviation of your portfolio from the estimated proportions. For example, the cost of XPR in our approximate portfolio increased from $25 to $30, while the cost of LTC decreased from $25 to $20, and the cost of BTC and ETH did not change. We now have 30% of our portfolio in XPR and only 20% in LTC, which is not in line with the 25% split that was originally conceived. To rebuild our portfolio, we can sell $5 worth of XPR and use that money to buy more LTCs. At the same time, our approximate portfolio will again have an initial distribution of 25% for each asset.
When does rebalancing happen?
The types of portfolio rebalance are different and can happen in different situations, but most often investors prefer periodic rebalancing. This rebalancing is performed at specific time intervals. In the crypto world, these intervals can be from several months to several hours
Unlike the traditional financial system, which often uses longer rebalancing periods, such as annual ones, cryptocurrencies are more volatile and allow for shorter time frames. Due to the high volatility of the crypto market, J’JO recommends 14-day or 28-day rebalancing periods.
Automatic rebalancing
Manual portfolio rebalancing requires certain skills. You need to make calculations and take time to return assets to their original proportions at the slightest change in the market. Is there an alternative? Yes! The J’JO service simplifies the process and takes over the rebalancing. You do not need to waste your time and energy: J’JO will return your portfolio to the initial asset ratios, rebalancing it for you.
Automatic rebalancing is great as investors do not need to follow the market, especially beginners. For example, the JJO service offers a ready-made J’JO35 index, which tracks 35 top cryptocurrencies and covers more than 80% of the entire market. As an investor, you no longer need to spend your time and resources guessing the most profitable asset. The index is convenient because it buys and sells cryptocurrencies itself, adding growing ones and excluding weaker ones.
By investing in this index, you get a balanced distribution of assets, risk diversification, and increased productivity. All this is possible due to the built-in settings of the investment-ready index J’JO35.
