process
Rebalance to target
The rule
Reset your mix back to plan on a fixed rule. It quietly sells a bit of what rose and buys a bit of what fell, with no emotion.
Where it flips
But rebalancing too often piles up costs and taxes, and can cut a real long-term winner too soon. The fix is to reset only on wide drifts or once a year, and watch the tax when you switch.
Left alone, your mix drifts. Winners grow big and losers shrink, until the mix no longer matches your plan. Rebalancing brings it back. On a set date or when it drifts too far, you trim what got costly and top up what got cheap. This does the hard, against-the-crowd thing for you, with no forecast and no brave mood needed.
A worked example
Aayra's 60/40 mix drifts to 72/28 after stocks soar. Rebalancing sells the extra 12% of stocks and buys bonds. That locks in some gains and restores the plan, the exact opposite of what fear and greed would tell her. [illustrative]
How to spot it
- ·the mix has drifted from target
- ·trimming winners, topping up laggards
- ·a set rule or date, not a hunch
Benjamin Graham · The Intelligent Investor