Most people have heard the saying “buy low and sell high.” Simply put; buy things when they are on sale, and sell them when they are at higher prices. While this sounds like great advice, many investors find it difficult to follow, because emotion gets in the way.
In the world of investment management, rebalancing is the process of maintaining targeted asset class weights through time. Because asset classes (stocks, bonds, real estate) tend to move in different directions at different times and different magnitudes, these divergences, over time, can push your targeted allocation out of ‘whack.’ That’s a technical investing term. These movements may result in a portfolio that is either more aggressive (risky) or more conservative than you had originally intended. Below is an example of how rebalancing can work:
Rebalancing back to the original target weights means you will be selling a portion of assets that have done well and are now at a relatively high price and buying assets that have not done as well, which are now at a relatively low price. Rebalancing does take a degree of discipline. It may seem counterintuitive to sell shares of an asset that has experienced recent strong performance or, conversely, to buy shares of an asset that has dragged behind. However, both of these actions are necessary in order to put the portfolio back into balance.
It often is said that there is beauty in simplicity. When it comes to portfolio management, systematic rebalancing is a simple and highly effective way for all of us to more consistently “buy low and sell high.”
Asset allocation and rebalancing do not ensure or guarantee better performance and cannot eliminate the risk of investment losses.
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