STEP
9  
Every December, rebalance by
setting up next year's investment plan to bring your
portfolio back into balance:
- As you go through the year,
some funds, unpredictably, will do better than others,
throwing your portfolio off balance
- For example, let's say in 2004
international funds did really well while
large-caps sagged (this really happened): in
December 2004, you change 2005's automatic
investing to buy more large-cap and less
international, bringing your portfolio back into
balance without having to sell anything
- Continuing with the example,
in 2005, international grows still more, while
large-cap still stagnates, so in December, 2005,
you change 2006's plan to buy still less
international and still more large-cap: when
large-cap takes off in 2006, you've correctly
kept buying in while the price was low
- Yearly rebalancing forces you
to dispassionately cut back on buying what's
high-priced and increase your buying of what's
low-priced—exactly what you should be doing
to be a successful investor
 |
That's it! See the
books on which this
9-step investment guide is based. |
|
What makes your portfolio
outperform others? Stock selection? Market timing? Second
order effects? Nope. Rebalancing! As long ago as 1991, research has shown that rebalancing—also called
asset allocation—can explain 91.5% of the variation
in a portfolio's return
| "My
favorite holding period is forever." - Warren Buffet
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