Let’s say that you have part of your assets
invested in the stock market. And over a period, stocks do really well. Eventually,
too much of your retirement account balance might be made up of stocks, which
doesn’t align with your goals. Or your investing style.
Because it can:
- Give you the opportunity to take a new look at all the investment options in
- Force you to take profits from the investment options which have run up and put
money in those that may have merit but haven’t gone up
- Smooth investment returns
In the example below, we’re assuming your
retirement portfolio is made up of:
Let’s say five years later you haven’t
rebalanced. And during that time, the stock market has outperformed the bond market.
So, now your portfolio is made up of:
This puts you at a potentially greater risk of
loss than you originally wanted. Rebalancing on a regular basis puts you back in
line with your 60/40 split.