Free Wealth Management Guide Building An Effectively Diversified Investment Por | Page 12

Rebalancing
Another important academic concept with respect to
investing is rebalancing. The asset classes in your portfolio will not all move the same. Therefore, the amount of
money you have in each asset class will change as markets
fluctuate. In other words, your allocation will drift, much
like a sailboat without a rudder. To keep your portfolio
on track, we periodically rebalance the holdings in your
portfolio to the target allocation percentages. This helps
to maintain your chosen level of risk and take advantage of price changes by automatically buying low and
selling high.
Rebalancing is a simple concept, but realizing the benefits
of it is a challenge for most investors because it often involves selling assets that have recently done well and buying assets that have recently done poorly. It is emotionally
difficult to sell winners and buy losers. Rebalancing helps
you to take advantage of these cycles and, most important, it keeps you at your chosen level of risk. Proper
rebalancing forces you to sell stocks when they are up and
buy them when they are down. This sounds counterintuitive and requires a strong sense of discipline and emotional detachment. Many individual investors do the opposite
of what they should do and it costs them dearly.

Index Funds vs. Asset Class Funds
Until fairly recently, the asset class funds that comprise
the i