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1.
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.
2.
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.
3.
As a general rule, if you are rebalancing your portfolio, you are aiming to _______.
Reach your original asset allocation. Rebalancing is normally about getting your portfolio back to its original asset allocation. Some investors, however, might rebalance at times for other reasons.
4.
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.
5.
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.
