One of the most common adjustments investors make at the end or beginning of a year is to rebalance their portfolios. Inevitably, some investments outperform others over the course of the year, and there is a good chance that you will need to make some adjustments to get your portfolio back in line with your original investment goals. Typically, asset distributors adjust their portfolios when they slip 5% or 10% throughout the year. If you rebalance only once a year, it’s likely that at least one of your investment categories is out of balance. For example, if you started the year with 40% growth stocks, 40% value stocks and 20% bonds, it is likely that in 2021 your allocation to growth stocks will now be too high. high, and you will have to reduce it and boost your other categories.
The reason for rebalancing the portfolio is twofold. First, it ensures that your portfolio continues to exhibit the risk and reward characteristics that you initially anticipated. Second, it’s a great way to protect your profits on winning positions and increase your underfunded allocations when they are going down. In other words, rebalancing requires you to “buy low and sell high”.
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