Rebalancing your portfolio can help maintain a proper asset allocation from "summary" of The Little Book of Bull Moves in Bear Markets by Peter D. Schiff
To ensure that your investments are properly diversified, it is essential to periodically review and adjust your portfolio. This process, known as rebalancing, involves selling assets that have grown too large a percentage of your holdings and using the proceeds to purchase investments that have become underrepresented. By doing so, you can maintain a balanced allocation of assets that aligns with your investment goals and risk tolerance. Rebalancing your portfolio can help prevent your investments from becoming too heavily weighted in a particular asset class, such as stocks or bonds. This is important because different asset classes have varying levels of risk and return potential. For example, stocks tend to offer higher returns over the long term but also come with greater volatility, while bonds are typically less risky but provide lower returns. By rebalancing, you can ensure that you are not overly exposed to the risks associated with any single asset class. Another benefit of rebalancing is that it forces you to buy low and sell high. When you sell assets that have appreciated in value, you are taking profits and locking in gains. Conversely, when you buy assets that have declined in value, you are purchasing them at a lower price, potentially increasing your future returns. This contrarian approach can help you capitalize on market fluctuations and improve the overall performance of your portfolio over time. In addition to maintaining a proper asset allocation, rebalancing can also help you stay disciplined and avoid emotional decision-making. During periods of market volatility, it can be tempting to make impulsive changes to your portfolio in response to short-term fluctuations. However, by sticking to a predetermined rebalancing strategy, you can avoid making rash decisions based on fear or greed. This can lead to better long-term results and a more stable investment experience.- Rebalancing your portfolio is a simple yet effective way to ensure that your investments are aligned with your objectives and risk tolerance. By periodically reviewing and adjusting your asset allocation, you can maintain a diversified portfolio that is well-positioned to weather market volatility and achieve your financial goals.
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