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Why Rebalance Your Investment Portfolio?

Rebalancing is necessary for a strategic investment allocation since each individual investment in a portfolio will have different returns. For example, over the long term equities usually outperform bonds. If the strategic allocation is 50% stocks and 50% bonds and stocks have a higher return, over time, the portfolio will have a greater than 50% position in stocks. To bring the allocation back to the overall strategic allocation, enough stocks would have to be sold and bonds purchased to get back to the 50/50 allocation. Note that if dividends and interest are reinvested in the same asset class or held in cash, this will also impact the rebalancing. An advantage to rebalancing with in a strategic asset allocation is that it enforces a discipline to sell the best performing asset classes and buy the lowest performing (buy low, sell high).

Reference:
Tools & Techniques of Investment Planning,

Leimberg, LeClair, Doyle & Robinson

Financial Calculators

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