A: Thanks for staying so focused! Your question raises an important point about portfolio rebalancing.
Rebalancing is the periodic adjustment of your own investments to reflect market conditions that have changed, buying and selling specific investments in order to bring your risk down and boost your returns. It’s a vital part of having an investment discipline.
Here’s how that works. Say John has $10,000 invested in the model portfolio: $5,000 in Base Builders, $4,000 in Growth & Income, and $1,000 into Rocket Riders.
A year later, John finds his Rocket Riders have appreciated by $500, his Growth picks are up $2,000, and his Base Builders have fallen by $1,000. So his 50/40/10 split is now more like 35/52/13. The value of his overall portfolio is up by $1,500, but his risks are mounting.
That’s where many investors find themselves now. The markets have run up some 150% from their March 2009 lows. Anybody who’s got stocks and who hasn’t rebalanced is just asking for a repeat of 1999 – or 2007 if (or when) things roll over.
Fortunately, the solution is very simple. To get back to his preferred 50/40/10 split, John “rebalances.” He harvests $350 in gains from Rocket Riders stocks, sells $1,400 from his Growth & Income holdings, and puts the proceeds ($1,750) into Base Builder choices (which have lost value and are therefore “on sale”). Now his risk is appropriately distributed again.
If you’re interested, you can find additional discussion of rebalancing on page 62 of “The Money Map Method.”