Strategy Intermediate: Rebalancing Your Portfolio

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1.
Why does it become necessary to periodically rebalance your portfolio?
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Some investments will naturally perform better than others and increase the risk of your portfolio. For this reason, you may need to readjust its risk level.
2.
Rebalancing your portfolio involves looking at where it has become lopsided over the years. What is most likely to have happened, as a general rule, with your bond and cash investments during this time?
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They will have shrunk in proportion to stocks. Generally, stocks will have grown faster, leaving the bonds and cash in a lower proportion of your portfolio. This usually calls for some rebalancing.
3.
What's the primary reason to rebalance?
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To control your portfolio's volatility. By rebalancing, you ensure that your portfolio isn't overly dependent on the success or failure of one investment, asset class, or style.
4.
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.
5.
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.