Rebalancing portfolio regularly helps maintain desired asset allocation from "summary" of All About Asset Allocation, Second Edition by Richard Ferri
Regularly rebalancing your portfolio is crucial in ensuring that your desired asset allocation is maintained. This process involves periodically reviewing your investments and making adjustments to bring them back in line with your target allocation. By rebalancing, you are essentially selling assets that have performed well and buying assets that have underperformed, in order to maintain the desired balance between different asset classes. The main goal of rebalancing is to keep your portfolio aligned with your risk tolerance and investment objectives. Over time, the performance of different asset classes can cause your portfolio to drift away from your desired allocation. For example, if stocks have a strong performance, they may come to dominate your portfolio and increase its overall risk level. On the other hand, if bonds underperform, they may make up a smaller portion of your portfolio than intended, reducing its stability. By rebalancing your portfolio regularly, you are able to control the level of risk in your investments and prevent your portfolio from becoming too heavily weighted in one particular asset class. This can help you avoid taking on more risk than you are comfortable with, while also potentially improving your long-term returns. Additionally, rebalancing can help you stay disciplined and avoid emotional decision-making, as it enforces a systematic approach to managing your investments. There are different methods for rebalancing your portfolio, such as calendar-based or threshold-based strategies. Calendar-based rebalancing involves setting specific time intervals, such as quarterly or annually, to review and adjust your portfolio. Threshold-based rebalancing, on the other hand, involves setting predetermined percentage ranges for each asset class and rebalancing when these ranges are exceeded.- The key is to establish a consistent rebalancing strategy and stick to it over time. This will help you maintain a disciplined approach to managing your investments and ensure that your portfolio remains aligned with your financial goals. By regularly reviewing and adjusting your asset allocation, you can have greater control over the risk and return characteristics of your portfolio, ultimately leading to a more successful investment experience.
