FYI: Rebalancing a portfolio is the term for adjusting a portfolio back to its original allocation. For example, a portfolio with 60% equity funds and 40% bond funds is a fairly balanced allocation. If the equity markets have a very good year, the original 60% portion might have grown to 70% equity, thus increasing the risk of the portfolio. A way to reset the portfolio back to its 60% equity portion is to sell off the 10% of profits in equity and purchase bond funds. This would restore the bond fund portion back to its original 40% of the portfolio.
It is extremely important to rebalance or adjust a portfolio at least once a year. When it comes to long-term investing, the asset allocation an investor chooses reflects both their risk tolerance ands performance over the long haul. Rebalancing will ensure that both of these objectives are achieved.
However, there are several other reasons why a mutual fund investor might want to rebalance their portfolio other than realigning back to their original allocation. Let us go over them in detail.
Regards,
Ted
http://mutualfunds.com/education/when-should-mutual-fund-investors-rebalance-adjust-portfolio/
