Step Four: Schedule a Time to Rebalance
By following the first three steps, you've created a portfolio that fits your unique goals and needs. You'll want to make sure your portfolio continues to fit your goals and needs, though. To keep your portfolio aligned with your strategy, you may need to rebalance. We cover this concept at a deeper level in the Rebalancing Your Portfolio article, but a quick introduction to rebalancing is below.
Rebalancing is the systematic practice of restoring your portfolio to its intended asset allocation, and this practice is a necessary step in portfolio management.
Stocks often gain more than bonds or cash (and some individual investments within each asset class will outperform others). Over long periods of time, stocks will probably take up more of a your portfolio than they did when you originally aligned the portfolio with your strategy (or your selected target model). And because stocks are riskier investments than bonds, your portfolio becomes riskier as your stock position rises. That's why it's important for you to systematically rebalance and restore your portfolio to fit your strategy. One way to do this is to schedule a time to rebalance at regular intervals and make sure to monitor your portfolio in between those intervals.
Another method of rebalancing is to adjust your allocations at times of significant market movement. Not all stocks do well at the same time. Maybe your portfolio's value stocks are rapidly outpacing the growth investments and significantly altering your intended asset allocation. If you don't restore your portfolio's balance between the two styles, your investment success could become increasingly dependent on the value investments.
When rebalancing, it's important for you to keep your goal in mind. As you get closer to needing the money you've invested, the strategy you previously created may also change. In general, a person's portfolio tends to become more conservative as they approach their goal.
Read Next: Monitor Your Investments