What Does It Mean To Rebalance Your Portfolio?

Price-Earnings ratios as a predictor of twenty...
Price-Earnings ratios as a predictor of twenty-year returns. From Irrational Exuberance, 2d ed. source (Photo credit: Wikipedia)

There are three simple rules to successful investing

  • Own Equities
  • Globally Diversify
  • Rebalance

Although these are simple in theory, they are very difficult for individual investors to diligently follow. To own equities seems the easiest to understand. However, when the stock markets around the globe are volatile, as they are now, equities are emotionally difficult to own. We need help to maintain our discipline.

To globally diversify your portfolio with low correlated asset classes is much more difficult to understand and beyond the scope of this short message.  At some point you should understand how a prudent portfolio is built to gain peace of mind in building your financial future.

This brings us to rebalance. What does it mean to rebalance your portfolio? Essentially it means buy low and sell high. As an example if international stocks in your portfolio are down, as they are now, and fixed income is up.  We will sell fixed income and buy international stocks. Sell high and buy low. There is no prediction of the future involved while the rebalance brings the portfolio back to its initial target allocations.

Remember no one can consistently predict the future. To succeed in investing we must follow an academically backed scientific strategy when building the right portfolio for each of us. Once built, we must remain disciplined to our plan.

Please send me any questions or comments.

As always we should own equities….globally diversify……rebalance.

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