I like to win. I test myself in races that require lots of preparation, daily practice, and physical exertion. My fellow competitors share that sense of accomplishment when the win is for the team or for an individual. My successes confirm my strategy, and I will continue to use it until it no longer works for me. That's also true in finance. If an investment is successful, most people naturally want to stick with it. But is that the best approach?
Here is an article from my online library that speaks to this issue:
Rebalancing Your Portfolio
It may sound counter-intuitive, but it may be possible to have too much of a good thing. Over time, the performance of different investments can shift a portfolio's intent — and its risk profile. It's a phenomenon sometimes referred to as "risk creep," and it happens when a portfolio has its risk profile shift over time. When deciding how to allocate investments, many
How Rebalancing Works
Rebalancing is the process of restoring a portfolio to its original risk profile. There are two ways to rebalance a portfolio.
- The first is to use new money. When adding money to a portfolio, allocate these new funds to those assets or asset classes that have fallen. For example, if bonds have fallen from 40% of a portfolio to 30%, consider purchasing enough bonds to return them to their original 40% allocation. Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss.
- The second way of rebalancing is to sell enough of the “winners” to buy more underperforming assets. Ironically, this type of rebalancing actually forces you to buy low and sell high. Periodically rebalancing your portfolio to match your desired risk tolerance is a sound practice regardless of the market conditions. One approach is to set a specific time each year to schedule an appointment to review your portfolio and determine if adjustments are appropriate.
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Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.
Source: Balancing Your Portfolio