Rebalancing (investment)
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Rebalancing is the action of bringing a portfolio of investments that has deviated away from one's target asset allocation back into line. Under-weighted securities can be purchased with newly saved money; alternatively, over-weighted securities can be sold to purchase under-weighted securities.
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[edit] Rebalancing controls risk
The investments in a portfolio will perform according to the market. As time goes on, a portfolio's current asset allocation can move away from an investor's original target asset allocation. If left un-adjusted, the portfolio could either become too risky, or too conservative. The goal of rebalancing is to move the current asset allocation back in line to the originally planned asset allocation.
[edit] Rebalancing strategies
There are many possible rebalancing strategies. The exact choice is probably not too important, as long as the rebalancing is performed consistently.
- Rebalancing every year:
- Rebalancing at exactly the same time each year is easy to remember.
- Rebalancing every 15 months:
- The hope is to make a sale qualify for long term capital gain in the United States.
- Rebalancing when current allocation is 5% off from target asset allocation:
- Touch nothing except when allocation is off noticeably.
[edit] References
- Taylor Larimore; Mel Lindauer, Michael LeBoeuf (2006). The Bogleheads' Guide to Investing. Wiley, page 199-209. ISBN 0-471-73033-5.
