{"id":23091,"date":"2021-01-18T13:32:55","date_gmt":"2021-01-18T17:32:55","guid":{"rendered":"https:\/\/www.shortform.com\/blog\/?p=23091"},"modified":"2021-01-24T18:13:18","modified_gmt":"2021-01-24T22:13:18","slug":"portfolio-rebalancing","status":"publish","type":"post","link":"https:\/\/www.shortform.com\/blog\/portfolio-rebalancing\/","title":{"rendered":"Portfolio Rebalancing: A Must for All Investors"},"content":{"rendered":"\n

What is portfolio rebalancing? How does it work and why do you need it?<\/p>\n\n\n\n

When you have an uneven split between stocks and bonds in your portfolio, it’s time to consider portfolio rebalancing. You’ll want to sell stocks and bonds to return to a 50\/50 split.<\/p>\n\n\n\n

Read more about portfolio rebalancing and the rebalancing strategy below.<\/p>\n\n\n\n\n\n\n\n

Portfolio Rebalancing<\/strong><\/h2>\n\n\n\n

What is portfolio rebalancing? Over time, as your investment values fluctuate, the proportion between stocks and bonds will deviate from your desired ratio. For example, if you start with $10,000 and a 50-50 split between stocks and bonds, over time you may end up with $6,500 in stocks and $5,500 in bonds, leading to a 54:46 split. At this time, you should \u201crebalance\u201d your portfolio<\/strong> to return to 50-50. You can do this by selling stocks and buying bonds, or if you have more money to invest, you would buy relatively more bonds than stocks in this round of investment to return to a 50-50 split. This is called portfolio rebalancing, or a rebalancing strategy. <\/p>\n\n\n\n

Here’s how rebalancing investments can help. You shouldn\u2019t rebalance more frequently than once or twice a year.<\/strong> If you\u2019re checking your investments on a daily basis and spending hours per week, you\u2019re getting too involved to be a defensive investor, and your emotions will likely start ruling your decisions.<\/p>\n\n\n\n

Dollar-Cost Averaging<\/strong><\/h4>\n\n\n\n

If you have a lump sum of money, how would you invest it? Some investors, tempted to get higher than market returns, might choose to \u201ctime the market,\u201d waiting until a market dip to invest. The very likely risk is that the investor turns out to be entirely wrong, either losing out on gains as the market rises, or mistiming the bottom. This is one method of portfolio rebalancing. <\/p>\n\n\n\n

In contrast, Graham recommends dollar-cost averaging<\/strong>\u2014split up the lump sum into multiple investments of equal amounts, distributed over a longer period of time (such as every month or quarter). This is a straightforward strategy that requires minimum thinking and emotional investment.<\/p>\n\n\n\n

Graham argues for the psychological benefits of dollar-cost averaging: you remain emotionally detached from the swings of the market<\/strong>. Regardless of whether prices are up or down, you invest the same amount. <\/p>\n\n\n\n

Practically, this prevents you from overreacting in bad directions when rebalancing investments:<\/p>\n\n\n\n