How to Rebalance a Portfolio
Re-balancing your portfolio is one way to reduce risk. By doing so, you make sure that your portfolio is not dependent on any class or type of investment. You should re-balance your portfolio at least once each year. The primary reason is that a certain type of investment may be popular for a few years and it may increase in value. But nothing remains popular forever, and it will be replaced by another category of investment. You're only fooling yourself by trying to anticipate the next trend.
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Instructions
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Recall the various categories of investments you originally held or develop a new mix of categories that meets your long-term objectives. If you are new to balancing your portfolio, go to Morningstar's Investment Policy Worksheet for assistance.
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2
Multiply the number of shares of stocks, mutual funds, or other equity investments, or the ultimate amount that you will receive from bonds with their current worth. Put them into the categories that you have determined in the first step. Undoubtedly, some individual investments have outperformed better than others, and an imbalance may have occurred.
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Determine whether an imbalance has occurred. For example, you have decided to put a certain amount into equities and fixed income. In good times, equities often outperform fixed income because there is a run-up in prices. Combine that factor with rising inflation, and the fixed income portion of your portfolio may actually have gone down in value, thus exacerbating the imbalance.
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Look for other reasons that your portfolio may be out of balance. Group the equity portion of your portfolio by industry. You may find that you own shares of industries that are significantly more or less than you wanted. The same goes for international versus domestic stocks, stock in large versus small companies, and in mutual funds.
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Sell issues in your portfolio that caused the imbalance. Put the proceeds either into stocks that have promising futures within the array that you currently hold, or start another category.
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