Introduction

The purpose of rebalancing your portfolio is not necessarily to increase your portfolio’s returns. Rather, it is to remain consistent with your preferred asset allocation and, thereby, to reduce the riskiness of your portfolio.1 However, rebalancing your portfolio reinforces the discipline of buying “low” and selling “high”.

Advice

First, ignore small changes of 10% or less.

But never panic. The correct response to a fall in an asset class is to buy more of that asset class, not to sell the asset class.

You should consider rebalancing your portfolio’s asset mix as you age.

Caveat

Rebalancing your portfolio doesn’t always work, specifically during prolonged periods of time when a financial market continuously appreciates or continuously depreciates. During these unique periods, you would hurt your portfolio returns by repeatedly purchasing a depreciating asset or repeatedly selling an appreciating asset.

Summary

Coming soon!

For More on this Topic

Edleson, Michael. Value Averaging. John Wiley & Sons. 2007.

Updated on December 21st, 2018