What Is Rebalancing?

Learn about rebalancing in this Howcast finance video with expert Gregory McGraime.

Transcript

Rebalancing is the process of making sure you're sticking to the investment plan that you're following. So let me give you an example. Uh, let's say I created my asset allocation plan which again is just the investment plan I'm going to be following, and for my money I think 60% of my money should be invested in stocks and 40% should be invested in conservative stuff like bonds and cash investments. That's the investment plan that I'm following. That's my asset allocation. So let me give you an example. If I'm following an investment plan that I deemed appropriate for my situation, let's say I'm investing 60% of my money in stocks and 40% in conservative stuff like bonds

and cash, so that's the plan that's right for my situation but what happens at the end of the year, some investments are doing better some are doing worse. It may be an up year, it may be a down year for some investments. But when I take a look at my account, rebalancing really means I'm going to make small changes to move money from one type of investment, maybe from a stock to a bond for example, to redistribute my accounts to get back to the 60/40 balance that's appropriate for my situation. What rebalancing does is really important and alot of people don't realize this because it takes the emotion out of your investing decision. When something goes up, you have to actually sell that amount and move it to an area that hasn't done as well to get back to the plan that you're following. So follow me here. What does it force you to do? It forces you to sell an investment that's doing good. That's something most people never want to do, and it forces you to buy an investment that hasn't done well. Think about it, if something goes down, when's the best time to buy it? At that lower price. But who wants to do that? Uh, most people don't because they're worried about it. So if you let your investment plan dictate your decisions, rebalancing helps you take the emotion out of your investing decisions and stick to the investing plan that's right for your situation.

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