How To Rebalance Your Portfolio

If you have diversified your investments and come up withRebalancing Portfolio an allocation model, you know how you want your portfolio to look. Over time, though, some investments do better than others. Eventually, those stocks that were supposed to be 15% of your portfolio will end up closer to 20%. So what are the best tips for rebalancing when that happens? First, if you are regularly adding to your account, a patient strategy of shifting how you invest new money is your best approach. Each time you add money to your account, invest the new cash in one of the asset classes that is below your targets. One deposit may be enough, or you may need to continue adding to the below-target class for several months.  When that class is on target, switch your investing to another below-target class. Take your time; the balance does not have to be perfect so long as you are moving in the right direction.

If you are not regularly adding to your account, you will need to sell some of your holdings from an above-target asset to buy into the asset class that is below your target.

Notice that both approaches mean selling or passing on shares of your best performing stock or fund—the one you've been thrilled with—in order to invest more in the dud that's been disappointing you. It might feel like a mistake, but this effect is part of what makes asset allocation work. You will find that following your plan helps you avoid the trap of buying the stuff that has already peaked and forces you to purchase the low-performing investments before they start their own rise in market cycle.

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