Just about a year ago I blogged about the importance of rebalancing your portfolio and gave a ‘how to’ example. This year I’ve added a column for 2018 returns – what a difference a year makes!
You should rebalance your portfolio at least once a year, more often if you’re so inclined (see Vanguard’s “Best practices for portfolio rebalancing” for an in-depth discussion). With some investments, rebalancing is included. For example, the four funds that comprise Vanguard’s various Target Retirement funds are kept in balance for you while Vanguard’s Personal Advisor Service includes quarterly rebalancing for clients.
Asset allocation is arguably your most important investing decision because it’s based on your personal risk tolerance, time horizon and financial goals. As some asset classes perform better than others, your portfolio can drift towards an allocation that’s not suitable or even risky. It’s then time to rebalance!
And, rebalancing helps to neutralize impulsive investor behavior, the kind that can tempt us to buy when we see a stock’s value rising and dump investments when we see them losing value. Rebalancing is the good cop – it forces you to buy low and sell high.
Focusing on a fixed point helps us hold the tree pose in yoga…in personal finance, your fixed point is your retirement goal…stay focused, stay balanced!