Most investors in the stock market know that it’s best to be patient and focus on the long-term.
However, this does not mean you should just set your investment allocations and forget it.
For instance, let’s say you have 60% of your portfolio in stocks and 40% in bonds. If you have a year or two of of big stock market gains but weak bond returns, then your allocations will have shifted towards stocks.
According to JP Morgan Asset Management, a 60%/40% portfolio two years ago would look more like a 69%/31% allocation today because stocks have been surging.
Suddenly, you’re much more exposed to stocks than you had planned to be.
In order to address this, you should regularly rebalance your portfolio. In this case, you should sell stocks and buy bonds and get back to your target allocations.
This simple strategy will force you to buy low and sell high.
“Rebalancing a diversified portfolio at least annually should continue to be the cornerstone of a disciplined investment approach that avoids status quo bias,” write JP Morgan Funds’ James Liu and Anthony Wile. “Figure 8 demonstrates the benefit of rebalancing a diversified portfolio annually: Over the past 25 years, rebalancing helped shield investors from being over and under exposed during market turmoil and rallies. This 60 per cent difference results from a disciplined approach of buying low and selling high.”
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