M* and the Importance of Rebalancing

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M* and the Importance of Rebalancing

Post by pingo » Fri Apr 05, 2013 11:50 am

Abbey Woodham at Morningstar.com has posted the following primer called The Importance of Rebalancing directed at young investors, but it is probably good for young and old alike:
Abbey Woodham wrote:The primary function of rebalancing is to control risk. The varying performance of asset classes over time causes a portfolio to shift away from its target asset allocation. For example, riskier assets exhibit more volatility, but also tend to outperform safer investments. Over time, as their proportional share grows, the risk of the portfolio drifts away from the target. Rebalancing controls this risk by moving capital between investments to re-establish the target asset allocation.
Source link: The Importance of Rebalancing

I did notice one assertion that has been discussed and essentially refuted on this board, but I think it is forgiveable and still instructive because it exposes one to some of the logic behind rebalancing:
Abbey Woodham wrote:Rebalancing also can boost return. In practice, rebalancing means selling high and buying low, which is a hallmark of disciplined investing.


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