Strategy Intermediate: Rebalancing Your Portfolio

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1.
If you have both small-company stocks and large-company stocks in your portfolio, which of them is more likely to have grown in proportion over time, assuming you haven't rebalanced during this time?
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Small-company stocks. Since small-company stocks have more growth potential, they likely will have grown more, thus necessitating rebalancing if you want to maintain the volatility level of your portfolio.
2.
If you want to save on taxes while rebalancing your portfolio, _______.
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Use new money to rebalance. Rebalancing less frequently will allow you to avoid taxes, as will selling securities from tax-deferred accounts BEFORE you sell securities from taxable accounts.
3.
Rebalancing often requires you to _______.
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Sell some of your winners. Investments that have done well will begin to take up more of your portfolio; those that haven't done as well will take up less. To restore balance, you may need to sell some of your winners.
4.
Which statement is false?
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Rebalancing doesn't allow you to benefit from a change in the market's favorites. Trimming back on a winner may have its tax consequences, but it allows you to reap the rewards of diversification and position your portfolio to benefit from a change in the market's favorites.
5.
Imagine you're investing for your retirement via a 401(k) plan and an IRA. How should you rebalance these accounts?
Choose wisely. There is only one correct answer.
Rebalance both simultaneously, because they make up one portfolio. If these accounts are all funding one goal, they are, for all intents and purposes, part of one portfolio. So when you rebalance, rebalance across all of these accounts simultaneously.