Diversification And Rebalancing

By now you are aware of the benefits of diversification. As this article states "you don’t diversify to gain the highest returns. You do so to ensure you don’t get the lowest." An important part of diversification that you should be aware of is rebalancing. Suppose that you decide you want a portfolio that has 70 percent stocks and 30 percent bonds. Since stocks generally have a higher return than bonds, over time, your portfolio weights will gradually shift more heavily toward stocks. Because of this, you should rebalance your portfolio periodically. In other words, you should sell some of the better performing asset and buy the other asset in order to return the portfolio weights to 70/30, your original allocation.