What Is Portfolio Rebalancing?

Ever wondered about the math being portfolio rebalancing? It’s a pretty simple concept, nothing earth shattering.

I still find that some investors don’t grasp the basic rebalancing concept however!

Rebalancing forces you to sell bits and pieces of your investment portfolio as they become overweighted in your account. Then it forces you to use the proceeds to invest in bits and pieces of your investment portfolio which has become underweighted in your account.


Does Portfolio Rebalancing Help You? When & How?

The short answer is portfolio rebalancing helps your investment returns when the markets are flat or down. When the markets are positive and strong, rebalancing actually hurts your performance.

This is because, rather than “letting it ride”, you’re selling chunks of investments which are continually doing well. Without rebalancing you’d simply be holding them out of apathy.

In a flat market – or one without a major uptrend or downtrend – portfolio rebalancing can help as well. It helps just like dollar cost averaging helps.

Rebalancing forces you to keep your target allocation in line with your allocation tolerances. This makes you to sell high and buy low.

In a down market rebalancing your portfolio can help as well, because you’re consistently selling what did well relative to other asset classes. Then you’re buying what didn’t perform well.

The best part of rebalancing your investment portfolio is the structure and consistency it brings to the investment process. Rebalancing helps remove emotion from the decision making process, because you have a set of tolerance and decision making processes you follow.