Why is rebalancing important?
Because it can:
- Give you the opportunity to take a new look at all the investment options in your portfolio
- Force you to take profits from the investment options which have run up and put money in those that may have merit but haven’t gone up
- Smooth investment returns
In the example below, we’re assuming your retirement portfolio is made up of:
Let’s say five years later you haven’t rebalanced. And during that time, the stock market has outperformed the bond market. So, now your portfolio is made up of:
This puts you at a potentially greater risk of loss than you originally wanted. Rebalancing on a regular basis puts you back in line with your 60/40 split.