"If you've chosen a target asset allocation-the mix of stocks, bonds, and cash in your portfolio- you're probably ahead of many investors. But unless you're investing in a set-and-forget investment option like a target-date fund, your portfolio's asset mix will shift as the market fluctuates. In a bull market you might get more equity exposure than you planned, or the reverse if the market declines. Rebalancing involves selling assets that have appreciated the most and using the proceeds to shore up assets that have lagged."
"This brings your portfolio's asset mix back into balance and enforces the discipline of selling high/buying low. Rebalancing doesn't necessarily improve your portfolio's returns, especially if it means selling asset classes that continue to perform well. But it can be an essential way to keep your portfolio's risk profile from climbing too high. Where and How to Rebalance If it's been a while since your last rebalance, your portfolio might be heavy on stocks and light on bonds."
Target asset allocation is the planned mix of stocks, bonds, and cash, but market movements will shift that mix over time. Rebalancing sells the best-performing assets and uses proceeds to increase lagging assets, restoring the target mix and enforcing disciplined selling high and buying low. Rebalancing may not boost returns if outperforming asset classes continue to rise, but it prevents the portfolio's risk profile from drifting higher. Check equity-versus-bond exposure, international versus U.S. stock weightings, growth versus value splits, and concentration in specialized assets like gold or bitcoin. Making adjustments within tax-deferred accounts is usually most tax-efficient.
Read at Fortune
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