Tutorial: rebalance a portfolio
Rebalancing is a machine for making the correct decision when you are least able to make it yourself.
Keep the portfolio you designed, rather than the one the market drifted you into.
How rebalance a portfolio works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
The market moves first, and recovers first
Shares fall before the data does and start climbing while the news is still uniformly awful. Waiting for the news to improve means buying after the recovery has happened.
- 1
Understand the drift
Left alone, a portfolio migrates towards whatever has recently gone up the most, which is usually whatever is now most expensive. You end up maximally exposed to the thing most likely to disappoint, without ever having decided to be.
- 2
Rebalance back to your target, not to a feeling
If you set 60% shares and they have run to 80%, you sell down to 60%. That is the whole rule. It will feel wrong every single time, because you will be selling the thing that is working.
- 3
Do it rarely
Once or twice a year is plenty. Rebalancing monthly racks up costs and tax and adds nothing. The benefit comes from the discipline, not the frequency.
In a taxable account, check the tax cost before you trade. Sometimes the right move is to rebalance with new contributions instead of sales.
You have a date in the calendar and a target allocation written down.
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Rebalancing is a machine for making the correct decision when you are least able to make it yourself.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.