Portfolio rebalancing is the process of adjusting the allocations of assets currently in your portfolio to maintain a desired allocation of assets. For example, you may begin with a portfolio that is comprised of 65% stocks, 20% real estate, 10% cash, and 5% cryptocurrency, which is your target allocation. However, over time your crypto outperforms your other assets and grows to be 25% of your portfolio, with your stocks, real estate, and cash making up the remaining 75% of your portfolio. In this case, to bring your asset allocations back to your target allocation, you would rebalance your portfolio by selling some of your crypto and moving these profits into stocks, real estate, and cash to bring your asset allocations back to your original target portoflio allocation.
The main reason that investors use the strategy of portfolio rebalancing is to prevent being overly exposed to undesirable risks. By periodically rebalancing their portfolios, investors ensure that they hold an asset mix that matches their risk tolerance. Since this strategy entails selling assets that have outperformed in order to buy assets that have underperformed, portfolio rebalancing essentially builds the "buy low, sell high" mantra into your investing process automatically.
Vanguard recommends checking your portfolio at least once per year, and to consider rebalancing if your asset allocation is off your target allocation by 5% or greater. Calendar rebalancing is the simplest portfolio rebalancing approach, where you analyze your portfolio holdings at a predetermined time interval and then adjust your holdings to match your target over a desired duration of time. This could mean you analyze your portfolio annually, biannually, or quarterly and then rebalance your holdings over a period of weeks or months to reach your target allocation.
There are multiple ways that you could rebalance your portfolio:
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