>
> What is frequent? I know the word, I am asking how frequent they
> suggest. Rebalancing can be done many ways, one way is that you
> reallocate every year+1 day so gains are taxed as long term (in taxable
> accounts, of course). Another is to rebalance if your allocation is +/-
> 5% out of range, e.g. you want 40% US stock, 40% foreign, 20%
> bonds/cash. If US % should go over 45% or under 35%, it's time to
> adjust. In the case of the 401(k), if there is no cost to rebalancing, I
> suppose you can do this quarterly or even monthly.
>
> The concept is more applicable to sectors than individual stocks, but
> consider, in the tech bubble many people rode the shares to the top and
> then down to the bottom. Those who were diversified certainly didn't
> lose the 80%+ that individual stock holders lost on some of those
shares.
To add to this, there are more reasons and ways to rebalance.
Rebalance with new contributions- meaning put new contributions in the
lowest performing investments (so you are buying "low").
In addition rebalancing is about defining risk tolerance. If you
invest say 5-10% in a speculative (risky) investment (like tech or
emerging markets) and you get a 70% return, what is your new risk
profile? You are currently taking on more risk in a speculative
investment.
At minimum, you will not go broke selling the 70% gain for a profit.
If you let it ride, you have a larger chunk of your porfolio going to
something you didn't want a big risk on in the first place. If you
sell, you lock in some or most of the current gains. If it goes up
70% again the next year, then you will have even more profits and
gains to sell- but the 5 or 10% original position will be a higher
dollar amount because the portfolio is worth more.
I rebalance 2X per year. In June I adjust contributions based on my
allocation (so lower performing assets get more money in second half
of year). In December I realign contributions and buy/sell as needed
to keep everything in balance.
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