BookYol

Concept

Rebalancing

Rebalancing is the habit of periodically selling some of whatever has grown beyond its target share of your portfolio and buying what has fallen behind, so your stocks-and-bonds mix returns to the split you chose in calm times.

Markets change your mix without asking. A 60/40 portfolio can drift to 70/30 after a strong year for stocks. You then carry more risk than you signed up for, usually without noticing. After a bad year, the drift runs the other way. Rebalancing corrects it. It makes you do the opposite of what fear and excitement suggest: trim what rose and buy what fell. That's why the rule matters more than the method. Pick a fixed date, such as once a year in January, or a threshold, such as either side drifting more than 5 percentage points from target. Then act on the rule, not the headlines. It isn't a trick to boost returns. Its job is to keep your risk where you set it. Point new contributions at the lagging side first, and you often won't need to sell at all.

A real-life example

Dana, a nurse, puts $100,000 into 70% stocks and 30% bonds and makes every January her rebalancing date. After a strong year, stocks are worth $90,000 and bonds $30,000, so she is now 75% stocks. Selling feels silly with the market this hot. Still, the rule says 70% of $120,000 is $84,000. She moves $6,000 into bonds in ten minutes and gets on with her week.

How to use it

  1. 1Write down your target split and one rule: rebalance on a fixed annual date, or when either side drifts more than 5 points.
  2. 2On that date, compare your actual mix with the target, and send new contributions to the underweight side first.
  3. 3If the gap is still large, sell only enough of the overweight side to get back to target. Note what you did and close the app.