What is rebalancing?
Let's start with the typical retirement portfolio of 60% bonds / 40% stocks.
$100,000 initial portfolio would be split into:
$60,000 in bonds and $40,000 in stocks
If at the end of the first month, stocks start falling and investors rush to the safety of bonds, your portfolio would now look like:
$65,000 in bonds and $35,000 in stocks
Normally, investment behaviour dictates that you will sell more stock and buy bonds to capitalise on the upswing. In fact, to keep the risk/reward ratio, you need to do the opposite and rebalance back to 60% bonds / 40% stock, so you would cash in some of the gains in bonds and buy some cheaper stocks.
This is the essence of rebalancing.
Furthermore, any profits or dividends received are now re-invested when it is time to rebalance, so that extra cash is used wisely.
This is all done automatically on your behalf, so you don’t need to worry about it.
This automation takes away investor behavioural decisions. It takes away the fear and greed of stock investing.
It takes away human emotion and replaces it with a mathematically based strategy that works around the clock for a lifetime.
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