The Bogleheads' Guide to Investing, 2nd Edition

Chapter Seventeen Track Your Progress and Rebalance When Necessary

Foolproof systems don’t take into account the ingenuity of fools.

—Gene Brown

There is no foolproof “one-size-fits-all” system for rebalancing your portfolio. Each investor must choose a rebalancing method that’s right for them. We want to make sure that whichever method we choose, it will be one that we’ll stick with through thick and thin during all market conditions. However, before we can make an educated choice, we need to know what rebalancing is all about, and what some of our options are.

In this chapter, we’ll discuss the reasons for rebalancing your portfolio, and cover a number of rebalancing options that you can choose from. We’ll also touch on some of the things we want to consider when it comes time to rebalance.

PRINCIPLES OF REBALANCING

Rebalancing is simply the act of bringing our portfolio back to our target asset allocation after market forces or life events have changed the percentages of our various asset classes and segments of those classes.

Why Rebalance?

Rebalancing controls risk. It brings our portfolio back to the level of risk that we determined was appropriate for us and that we were comfortable with when we first established our asset allocation plan. As we learned earlier in Chapter 12, one of the primary reasons we hold a diversified portfolio is that asset classes don’t always move in sync, and even when they do, they don’t all have the same expected rate of return or risk ...