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Many advisors recommend you rebalance at least annually. After a year of market movement, to rebalance, you must shift your money among asset categories to return to your original asset allocation. Here is a simple example of rebalancing using three buckets: stocks, bonds, and cash. Let’s say the right allocation for you was 65% of your investments in stocks, 25% in bonds, and 10% in cash and you allocated your assets that way at the beginning of 2001. Then each month, you invested $100 split 65%, 25%, and 10% accordingly. By the end of 2001 your stocks may have fallen to be about 55% of your portfolio. If you want to keep the same investment mix, then it’s time to rebalance by selling some of your bond and money market investments and investing the proceeds into your stock account. (Remember when you sell the bonds, you may have a taxable event.)
The market can be very volatile on a day-to-day basis. Keep in mind that you’re investing for the long term and don’t be panicked into selling every time it takes a dip. Those who do invariably lose money by buying high and selling low.
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