Rebalancing Your Portfolio

If an investment is successful, naturally you want to stick with it. The last thing you want to do is sell some of your winners to put more money in investments that aren't doing as well.

No matter how unnatural this practice, called rebalancing, seems however, it's an essential part of managing an investment portfolio.

What is Rebalancing?

Rebalancing is the systematic practice of restoring your portfolio to its intended asset allocation.

You don't have to do anything to your portfolio for it to change; some of your investments will do particularly well, while others won't. (That was the whole point of diversifying the portfolio in the first place, remember?) Those investments that have done well will naturally begin to comprise a larger percentage of your portfolio; those that haven't done as well will take up less. And again, you don't have to do a thing for that to happen.

But every so often you should readjust your portfolio to restore the desired balance. If your investment goal hasn't changed, your portfolio's mix shouldn't either. Because of market forces, however, it does, and you'll need to rebalance to address those changes.

Read Next: Why Bother with Rebalancing?

Keep in mind that while diversification may help spread risk it does not assure a profit, or protect against loss, in a down market.