When managing an investment portfolio, rebalancing is an essential yet often overlooked strategy among individual investors. Rebalancing involves adjusting the proportions of assets in a portfolio to maintain a target allocation. For example, if you allocate 10% to an Israel fund and it increases in value, you may end up with more than 10% of your portfolio in that fund. Rebalancing requires you to sell off the excess and bring it back down to the target allocation. This allows you to automatically take profits when an investment performs well.
Moreover, rebalancing serves another critical purpose: buying low. When an asset drops in value and falls below its target allocation, you can purchase more of it at a lower price to bring it back up to the desired level. This dual function of selling high and buying low can contribute to long-term profitability and help in quicker recovery during downturns. Rebalancing essentially ensures that your investment strategy remains aligned with your financial goals, particularly over the long term.
Neglecting to rebalance can result in a portfolio that is either too risky or too conservative compared to your original plan. For example, an IRA account that isn’t rebalanced might become more aggressive if higher-risk assets perform well. Conversely, it may become too conservative if defensive assets grow disproportionately. Both scenarios can steer you away from your optimal investment path.
Many investment platforms, including Timothy, offer automated rebalancing features that can simplify this process. It is recommended to rebalance at least quarterly to keep your portfolio in check. By doing so, you ensure that your investments are working as efficiently as possible to meet your financial objectives.