Read an interesting article by Chet Currier @ Bloomberg on portfolio rebalancing, which is something most of average stock market investors ignore and plain are unaware of!
The idea is simple: You have an asset allocation plan, in terms of percent of investment allocated to each type of asset. To begin with, most of us match our actual investments with the allocation plan. But do we review this periodically and make sure it stays the same? Hmmm...
The Vanguard Group says that every investor should review the portfolio at least annually ( probably more frequent than that) and rebalance it if your allocation of stocks and bonds has shifted from your target by more than 5% points.
Why is this needed? Simply because some of your assets appreciate while some others could depreciate, changing the investment % of total assets you have. The rebalancing is of course a simple matter of re-allocating funds from one asset to another based on the level of each investment at that point in time. What is not a simple matter is us average investors remembering to do that!
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