Today on the Finance Flash Go! podcast, we are talking about an amazingly simple and effective investment strategy called rebalancing!
Ok to start, we are assuming that at this point you have determined your asset allocation and bought funds according to your asset allocation. What next?
When investing in anything, the goal is to buy low and sell high. Then you earn the difference between the buying price and the selling price.
But how can you do this in the market without timing it or guessing the future, which we cannot reliably do?
It’s actually incredibly simple.
After you buy your funds in your asset allocation, do nothing. Then once or twice a year, rebalance your portfolio back to your set asset allocation.
But, how do you do this?
Here’s an example of how to do this.
Let’s say your goal asset allocation sis 80% stocks, 10% bonds, and 10% REITs.
Some years, stocks will do better than bonds and REITs.
At the end of the year using our example, you may have 90% stocks, 5% bonds, and 5% REITs (because stocks performed better).
To rebalance, you would sell enough stocks (you are selling high) and buy enough bonds and REITs ( you are buying low) to get an allocation back at 80% stocks, 10% bonds, and 10% REITs.
Do this and you are guaranteed to ALWAYS sell high and buy low.
Alternatively, you can divvy up whatever new funds you will be investing in the correct proportion to rebalance your asset allocation back to its predetermined percentages. This way, you can just buy low and don’t need to sell (and risk any tax implications).
Now sit back another year and do the same thing.
Rinse, lather, repeat.
You are now investing without needing to predict the future (impossible) or constantly stalk the finance pages (misleading) in a manner guaranteed to have you buy low and sell high (that’s how you make money, right?).
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