Rebalance your portfolio regularly to maintain diversification from "summary" of Random Walk Guide To Investing by Burton G Malkiel
Regularly rebalancing your portfolio is essential to ensure that you maintain diversification. Diversification is the concept of spreading your investments across different asset classes to reduce risk. Over time, the value of your investments may change, causing your portfolio to become unbalanced. For example, let's say you initially allocated 60% of your portfolio to stocks and 40% to bonds. If the stock market performs well and the value of your stocks increases significantly, the proportion of stocks in your portfolio may rise to 70% while the proportion of bonds falls to 30%. This increased exposure to stocks may expose you to higher risk than you are comfortable with. To maintain diversification and manage risk, you should periodically review your portfolio and adjust your asset allocations. By selling some of your overperforming assets and buying more of your underperforming assets, you can bring your portfolio back to its original target allocation. This process allows you to "buy low and sell high," as you are essentially selling assets that have become more expensive and buying assets that are relatively cheaper. Rebalancing your portfolio regularly also helps to control emotions and prevent you from making impulsive decisions based on short-term market fluctuations. It forces you to stick to your long-term investment strategy and avoid chasing hot trends or trying to time the market. Moreover, rebalancing can potentially improve your investment returns by forcing you to sell assets that have become overvalued and buy assets that are undervalued. This disciplined approach to investing can lead to better risk-adjusted returns over the long run.- Maintaining diversification through regular portfolio rebalancing is a key component of a successful investment strategy. By periodically reviewing and adjusting your asset allocations, you can better manage risk, control emotions, and potentially improve your long-term investment performance.
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