Rebalancing your portfolio can boost returns, especially when the stock market is falling. To rebalance:
1. Set a target asset allocation. You want so much in large-company U.S. stocks, so much in small companies, so much in foreign stocks, etc.
2. Periodically buy and sell different investments to keep your allocation around the target. In essence, you sell what has done well and buy what has lagged. If you don’t rebalance, the investment categories that do well may continue to grow as a percentage of your portfolio until they crash, and then significantly underperform the markets. The asset classes that do the best often bubble and burst, but rebalancing can avoid this.
Stocks that have dropped in price are often considered to be value stocks. On average, value stocks do better than growth stocks. By rebalancing, you’ll wind up with more value stocks and fewer risky growth stocks.
You also should hold some fixed-income investments such as bonds and bond funds, even if you consider yourself an aggressive investor. Fixed-income investments provide cash for you to invest during and after a market correction, when stock prices are low.
