With stocks continuing to enjoy a roaring bull market, rebalancing is on the minds of many investors—or at least it should be. Disciplined investing starts with choosing long-term targets for the asset classes in your portfolio and making regular adjustments to stay on course. Rebalancing discourages you from chasing performance, timing the markets and taking inappropriate risk.
There are three main rebalancing strategies. The first is based on the calendar: you might rebalance annually, or even several times per year. (Many balanced funds, for example, rebalance every quarter.) The second is based on thresholds: a rebalance might be triggered any time an asset class is five percentage points off its target. Finally, you can rebalance with cash flows, buying underweight asset classes with new contributions or cash from distributions (or, if you’re drawing down your portfolio, selling overweight positions when you make withdrawals).
In the real world, most investors probably do some combination of all three, and that’s fine. But there’s a good argument to be made for emphasizing the cash-flow method.
Go with the flow
Rebalancing with cash flows is particularly useful for those making regular contributions. The idea is that you deposit cash in your account every month or so,