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How often should I rebalance my investment portfolio?


Good question, and one that investors ask too infrequently because they are unaware of the value of rebalancing. For those who are unfamiliar with the idea, rebalancing is the adjustment of weightings of assets in a portfolio to bring them back in line to desired levels. Say you prefer to have 60 percent invested in stocks and 40 percent in bonds. If stocks outperform bonds for a significant period, the balance will be thrown out of whack as stocks account for a growing proportion of total assets. The balance can be brought back into line by selling stocks and buying bonds. There will be an added benefit of enhanced returns over the long haul because you are buying what has become cheaper and selling what has gone up in price – buying low, selling high.
As for how often you should do it, some financial planners suggest once a year, but that runs the risk of missing opportunities to adjust weightings after big runs of strong and weak performance in certain assets. Others say rebalancing should be done as frequently as every quarter, but that can raise transaction costs and keep investors too focused on ephemeral market ups and downs. Every six months seems a fair compromise. Better yet, why not ignore the calendar and rebalance whenever weightings fall out of alignment by as much as 10 percentage points? So if you want to maintain a 60/40 balance and the mix goes to 70/30 or 50/50, it’s time to tinker.
-Conrad de Aenlle