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?
Choose wisely. There is only one correct answer.
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.
Rebalancing often requires you to _______.
Choose wisely. There is only one correct answer.
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.
3.
If you want to save on taxes while rebalancing your portfolio, you would do best by selling investments held in _______ accounts.
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Tax-deferred. You will rack up much less in capital gains this way.
4.
Which statement is false?
Choose wisely. There is only one correct answer.
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.
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?
Choose wisely. There is only one correct answer.
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.