Rebalance your portfolio regularly from "summary" of Common Sense on Mutual Funds by John C. Bogle
Rebalancing your portfolio regularly is a crucial aspect of successful investing. As you allocate your assets across different asset classes, such as stocks, bonds, and cash, the relative values of these investments will change over time. The prices of stocks and bonds fluctuate daily, which can lead to a situation where your portfolio becomes skewed towards one asset class. For example, if the stock market experiences a significant rise in value, the percentage of your portfolio invested in stocks will increase. This shift may expose you to higher levels of risk than you are comfortable with. On the other hand, if the bond market performs well, your portfolio may become too conservative, potentially limiting your returns. To maintain your desired risk profile and investment objectives, it is essential to rebalance your portfolio periodically. By selling assets that have appreciated in value and buying assets that have underperformed, you can realign your portfolio with your target asset allocation. This process allows you to "sell high" and "buy low," which is a fundamental principle of successful investing. Rebalancing your portfolio also helps you to stay disciplined and avoid making emotional investment decisions. During times of market volatility, it can be tempting to chase performance by increasing your exposure to hot investments. However, this strategy often leads to buying high and selling low, which is detrimental to your long-term investment goals. By rebalancing your portfolio regularly, you can take advantage of market fluctuations and ensure that your investments are aligned with your risk tolerance and financial objectives. While the frequency of rebalancing will depend on your individual circumstances, a good rule of thumb is to review your portfolio at least once a year. This practice allows you to make informed decisions based on your financial goals and market conditions.
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