Have you noticed that one investment in your portfolio performs better than the others? It’s tempting to think, “If it’s doing well now, it will continue.”
Our brains expect the future to be like the past. This thought leads us to invest more in top-performing options, believing they will keep doing well. However, we often act differently in other areas of life; we usually buy when prices are low instead of after they increase. In investing, just because something has done well doesn’t mean it will continue to grow. Investments can go up and down over time. The ones that are doing well now may slow down, while those that look less promising might improve. How can we stop chasing trends and take advantage of market changes? This is why rebalancing is important.
What is Rebalancing?
When your portfolio has investments with different returns, it can stray from your original plan. Rebalancing means regularly adjusting your portfolio to get back to your target mix. Instead of just investing in the best performers, you sell some of those and buy more of the ones that are not doing as well. This might seem strange, but it helps you stay disciplined and follow your investment plan. Rebalancing involves selling high and buying low, which means taking profits from expensive investments and putting money into cheaper ones. This approach helps you handle market ups and downs without trying to predict them. It also keeps your investments aligned with your financial goals. As markets change, your portfolio can drift from your plan, but regular rebalancing ensures you stay focused on your goals. In a fast-paced world, rebalancing helps you concentrate on your long-term success, preventing you from making decisions based on temporary market changes or emotions.
Consistency Over Predictions
Successful investing depends on a steady strategy instead of trying to guess which investments will do well. Rather than trying to time the market, concentrate on keeping a diverse portfolio that fits your long-term objectives. Rebalancing helps you take advantage of market changes. We recommend rebalancing only when your portfolio significantly strays from its original plan. This means selling some successful investments and buying more of the ones that aren’t doing as well—similar to giving your portfolio a quick tune-up.
