Balancing Act
Balancing Act

Periodic portfolio rebalancing is an important strategy for risk maintenance, allowing you to adjust your current allocation back to your target allocation. Rebalancing most frequently involves selling shares that have appreciated significantly and buying more of those that have grown more slowly, ensuring a consistent level of risk exposure in a portfolio.

Figure 12-1 reflects the mechanism of maintaining the discipline of rebalancing. It seems counterintuitive to sell off a portion of an investment that has outperformed others in order to buy one that has underperformed. However, out-of-balance portfolios with asset classes that have grown beyond their target allocations take on inappropriate risk exposures.

Figure 12-1

Step 12RebalancingPortfolio Risk ExposureRisk Capacity