Rebalancing

1. Definition

Rebalancing is the process of realigning the weightings of a portfolio of assets. * It involves periodically buying or selling assets to maintain an original or desired level of asset allocation.

2. The Mechanism (The Magic)

It forces investors to adhere to the golden rule of investing: "Buy Low, Sell High." * If Stocks rise and Bonds fall, your portfolio becomes overweight in Stocks. * To rebalance, you must sell some of the outperforming Stocks (Locking in profit at a high) and buy more of the underperforming Bonds (Buying at a discount).

3. Methods

1. Calendar Rebalancing: Adjusting the portfolio at predetermined time intervals (e.g., Annually or Quarterly). It requires zero market analysis.
2. Corridor (Threshold) Rebalancing: Adjusting only when the asset allocation drifts beyond a certain percentage (e.g., The 5% rule).

4. Why it matters

• Risk Drift: Without rebalancing, a balanced portfolio (50/50) can drift into a high-risk portfolio (90/10) during a bull market. When the crash comes, the damage is far greater than intended.
• Discipline: It removes emotion from investing. It prevents FOMO (buying at the top) and Panic Selling (selling at the bottom).