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1.
What is rebalancing?
Restoring your portfolio to its original risk level by buying and selling funds until you reach your original allocation. Once you've built your portfolio, you need to monitor it and occasionally rebalance.
2.
Which of the following is not a tax-efficient way to restore balance to your portfolio?
Rebalance your taxable accounts by selling your winning holdings. Paying attention to tax efficiency is an important part of the rebalancing process. Focus rebalancing efforts on your tax-sheltered accounts. If you must rebalance within your taxable accounts, consider doing so by adding to laggard holdings rather than selling.
3.
What is a sensible way to determine whether rebalancing your portfolio is in order?
Check your current allocations versus your targets. If your overall exposure to the major asset classes is five or more percentage points higher or lower than your targets, it's a good time to rebalance. A Vanguard study showed that investors who rebalanced their investments when their weightings diverged from their targets by five percentage points reaped many of the same benefits as those who rebalanced more often. Moreover, these investors saved themselves unnecessary labor and, in the case of taxable investments, some money.
4.
Which is the most important part of your portfolio to rebalance?
Your asset allocation of stocks, bonds, and cash. Studies have found that investors obtain the most risk control from rebalancing by asset class.
5.
What might cause the need to rebalance?
Both market activity and a change in your asset allocation parameters. Some asset classes will grow faster than others and may become a bigger part of your portfolio than you want. Also, as most investors age, their asset-allocation parameters get more conservative. Both changes may require portfolio rebalancing.
