Chapter 5. Stirring the Mix: Portfolio Rebalancing
Asset allocation has an important partner called portfolio rebalancing. Rebalancing takes asset allocation to the next level, unlocking additional power that helps make your portfolio more profitable and less volatile.
In this chapter, we look closely at rebalancing. We explain that rebalancing supports the underlying intent of asset allocation; it doesn't rethink it. In addition to helping you stay true to your asset allocation, rebalancing actually delivers better risk/return performance than a lazy buy-and-hold strategy.
You'll find that it takes some intestinal fortitude to be a rebalancer. It requires going against your intuition and making changes to your portfolio that may seem nonsensical to your friends and counter to what the pundits on TV urge you to do. But you'll see that it's worth it. You'll discover that, through rebalancing, you'll be able to finally enjoy that free lunch you've been looking for all these years.
Understanding how to successfully rebalance your portfolio will enable you to exploit the power of the periodic table — the investment periodic table, not the one above the chalkboard in your high school chemistry class — and put the principle of volatility pumping to work for you. We cover both of these concepts in this chapter. And after you read all about them, it'll ...
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