Lesson 83 - Rebalancing a Portfolio
Rebalancing a portfolio means adjusting the mix of assets back to your target allocation. Over time, some investments grow faster than others, causing your portfolio to drift away from your intended risk profile. Rebalancing restores balance, ensures you are not taking on unintended risk, and keeps your portfolio aligned with your goals.
Why rebalancing matters
Imagine you planned for 60% stocks and 40% bonds. After a few years of strong stock growth, your portfolio might shift to 75% stocks and 25% bonds. This gives you higher risk than you originally intended. Rebalancing brings you back to 60/40, protecting you from being overexposed if the stock market crashes. It also enforces a discipline of buying low and selling high.
Table: Example portfolio drift
Graph 1: Portfolio drift over time
The line chart shows how stocks can grow faster than bonds, causing the actual allocation to drift away from the target.
Without rebalancing, risk exposure keeps rising as stocks dominate the portfolio.
Graph 2: Growth before and after rebalancing
This chart shows two portfolios over 15 years: one that rebalances annually, and one that never rebalances.
Rebalancing smooths the ride, reducing extremes while preserving long term growth.
Story: Anna’s disciplined rebalancing
Anna, 35, invested with a 70/30 stock-bond allocation. After years of strong stock growth, her portfolio drifted to 85/15. Instead of letting it ride, she sold some stocks and bought bonds to return to her target. When a bear market hit, her losses were smaller than friends who stayed fully in stocks. Rebalancing helped her stay on track and avoid panic selling.
Why rebalancing matters for you
Rebalancing enforces discipline. It forces you to sell some of what has become expensive and buy more of what is cheaper. It keeps risk aligned with your goals. Without it, portfolios drift into riskier territory, exposing you to losses you may not be prepared for. The right frequency depends on your style: some rebalance annually, others when allocations drift more than 5%. The key is consistency.
Summary
- Rebalancing resets a portfolio to its target allocation.
- It reduces risk from drift and enforces buy low, sell high behavior.
- Charts show drift over time and smoother growth with rebalancing.
- Discipline prevents panic and keeps long term goals on track.
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