In Lesson One of Asset Allocation, we learned that when investment professionals say “Stay the course”, they mean investors should maintain their investment strategy, which typically refers to the portfolio’s asset allocation or the percentage amounts allotted to certain investment categories in your portfolio.
In March 2020 most asset classes lost significant value, some almost 30% and others less than a percentage point. After those market declines, most investment portfolios were not in line with their stated investment strategies. What do you do when you find that your asset class percentages are not in line with your investment strategy due to changes in prices?
You rebalance the portfolios to bring the asset class amounts back to their strategic weights. How does that work?
In late February 2020, bond portfolio values increased significantly relative to stocks. Put another way, stock prices declined faster than bonds. Provided you have an asset allocation consistent with your goals and circumstances, in order to bring the portfolio back into balance, you would need to sell bonds and exchange them for more stocks until the portfolio is back into balance.
Now that you understand the process of rebalancing, WHEN should you rebalance? Find out in Lesson Three of Asset Allocation.
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