How to Buy Low, Sell High, and Reduce Risk by Rebalancing Your Investment Portfolio

December 30, 2006

How often do you rebalance your investment portfolio?

My trend of rebalancing my 401k in the last days of December ended yesterday. I like to make the changes before the last business day of the year because our 401k administrator only gives us a certain number of free transactions per year. A busy day at work caused me to forget the rebalancing so now I’ll have to wait until the first week of 2007.

Why Rebalance?
Christine Benz from Morningstar explains in this article the benefits of periodically rebalancing your portfolio. One of the benefits is it helps you buy low and sell high:

“When you rebalance, you put money into those securities that have held steady or dropped in value (your losers) while paring back on those investments that have grown more expensive (your winners).”

She suggests the following points to “Tune Up Your Portfolio in Six Easy Steps”:

1) Find Out Where You Are Now
2) Find Out Where You Need to Be
3) Compare Your Target Allocations with Where You Are Now
4) Be on the Lookout for Investment-Style Bets
5) Tinker, Starting with Your Tax-Sheltered Accounts
6) Plan to Make a Habit of It

How to Rebalance
If you’re wondering about the best way to go about rebalancing, John Coumarianos over at Morningstar walks us through an example of doing some maintenance on a sample portfolio. He reminds us of the importance of this necessary task and that it can help reduce our investment risks:

“whether you conduct rebalancing at year-end or less frequently, it’s a great way to reduce your portfolio’s overall risk level and ensure that its current allocations are on track with your targets.”

Rebalance Away!
Use Morningstar’s X-ray tool to look at all your investments, not just your 401k or IRA. Don’t be like me, don’t forget to rebalance!

Ben

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Ben

Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn’t like the other kids… His addiction to personal finance has paid off for his family and now he’s helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.


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