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re: Do you rebalance your retirement portfolio?
Posted on 1/4/13 at 5:09 pm to Y.A. Tittle
Posted on 1/4/13 at 5:09 pm to Y.A. Tittle
quote:
But, if I keep my purchase allocation the same, wouldn't their tendency to fluctuate work itself (balance itself?) out in the end, or at least have an equally beneficial result than if I rebalanced my entire holdings on some sort of regular basis?
The whole point of rebalancing at regular intervals is that you're selling high in your more weighted asset class and buying low in your less weighted asset class. So to keep it simple, if you're 50-50 bonds and stocks, but stock market performance is strong and you're skewed 70-30, by rebalancing you're betting that your stock holdings are performing better than is to be expected over the long term and reducing your risk exposure to a market down-turn.
Allowing your holdings to fluctuate regularly is effectively betting against your initial asset allocation model, leaving yourself with more or less market exposure in a particular class than intended. So if you remain 70-30 stocks/bonds, and your stock holdings underperform your expectations, then you will realize that underperformance over a greater portion of your holdings than initially intended.
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