Portfolio Rebalancing: Diversification, Risk Control and Withdrawals
Rebalancing reduces a portfolio’s risk by maintaining the benefits of diversification, taking advantage of lower valuations and providing an alternative to panic in the midst of a bear market.
It can also increase your overall net worth during periods of turbulent market conditions. These benefits exist regardless of whether you take withdrawals or not.
In this article
- Rebalancing and Diversification: Two Close Siblings
- A Hedge Against Volatility and Emotions
- How to Rebalance
- Rebalancing and Returns
- Notes About the Returns
- Alternatives to Rebalancing
- When to Rebalance
- Other Assets and Investments
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Given the benefits, rebalancing should be a commonly touted investment strategy. Unfortunately, too often it is an overlooked sibling in the family of investment approaches. This may partially explain why I always get questions whenever I speak about rebalancing. In this article, I explain what rebalancing is, show you examples of how it impacts performance and discuss two alternatives.
Rebalancing and Diversification: Two Close Siblings
Investors constantly hear about the importance of diversification. Including a mix of assets in your portfolio can increase return and reduce risk. Diversification works because different assets, and even different types of investments within the same asset class, exhibit unique return characteristics. One example: Large-cap stocks move independently of bonds over the long term. Similarly, small-cap stocks do not always move in the same direction or exhibit the same magnitude of price change as large-cap stocks do.
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