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Rebalance your portfolio regularly to maintain your desired asset allocation from "summary" of The Four Pillars of Investing: Lessons for Building a Winning Portfolio by William J. Bernstein
To maintain the desired allocation, investors need to periodically rebalance their portfolios. This means selling assets that have done well and buying those that have done poorly, which, counterintuitively, is exactly the opposite of what most people do. For example, if equities have a great year and bonds a bad one, the stock portion of your portfolio will grow, potentially out of proportion to your target allocation. Consequently, you will need to sell some equities and buy some bonds. Over time, your portfolio allocation will drift from its target mix, and this will increase its risk. Most investors are reluctant to rebalance because it forces them to sell assets that have done well and buy those that have done poorly. This behavior is directly contrary to the "buy high, sell low" instinct that is so hard to overcome. But rebalancing is essential. In the long run, it is not the return of your portfolio that matters, but the return you achieve on it. And the best way to achieve the highest return for a given amount of risk is to maintain a consistent asset allocation. Rebalancing ensures that you maintain the desired allocation through thick and thin. Rebalancing is not only about return optimization but also about risk control. If you neglect to rebalance your portfolio, you might end up with a portfolio that is much riskier than what you intended. For example, during a bull market, equities can significantly outperform bonds, leading to a higher allocation to stocks. However, when the bear market arrives, you could face more significant losses than you can handle. Rebalancing regularly helps you avoid these situations by keeping your risk level in check. By periodically selling winners and buying losers, you ensure that your portfolio remains aligned with your risk tolerance.- Rebalancing your portfolio regularly is crucial for maintaining your desired asset allocation. It helps control risk and optimize returns over the long term. Despite the emotional challenges of selling assets that have performed well and buying those that have done poorly, rebalancing is a necessary discipline for successful investing. By staying true to your target mix, you increase the likelihood of achieving your financial goals while managing risk effectively.
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