What this lesson is about
Rebalancing forces a systematic 'sell high, buy low' discipline that fights your own instincts on purpose.
Part 1 of 2
Rebalancing helps you stick to a 'sell high, buy low' strategy that goes against your instincts. Over time, your portfolio's mix can drift. If stocks perform well in a year, they’ll take up more space in your portfolio than you planned. Rebalancing means you trim what's grown and add to what’s lagged, getting you back to your original target allocation.
It can feel uncomfortable to sell a winner and buy a laggard. Most people want to 'let winners ride.'
Quick check
What is portfolio 'rebalancing'?
Left alone, a portfolio's actual mix drifts away from its target as different assets grow at different rates - rebalancing corrects for that drift.
Part 2 of 2
Quick check
If stocks have a great year and grow to be a much larger share of your portfolio than your original target, what would rebalancing typically involve?
The goal is restoring the ORIGINAL target ratio, which after a stock rally usually means trimming stocks and adding to what's now underweighted.
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