Unit 2 · Level 3 · Asset allocation
Rebalancing
Set a 60/40 mix and walk away, and the market quietly rewrites it. A strong stock year might leave you at 70/30, riskier than you chose, right after prices rose. Rebalancing means trimming what grew and topping up what lagged, dragging the mix back to plan. It feels wrong every single time. That's the point.
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What you get asked
Why is rebalancing sometimes called 'the discipline that buys low automatically'?
No forecasting is involved; the arithmetic of restoring the target does the contrarian work. You systematically trim winners and add to laggards without needing courage in the moment.
Your €100,000 portfolio has drifted to €70,000 stocks / €30,000 bonds. Target is 60/40. How many euros of stocks do you sell (and move into bonds) to get back on target?
Target is €60,000/€40,000, so €10,000 moves from stocks to bonds. Notice what just happened: you sold the asset that had run up, buying low and selling high by pure arithmetic.
Put an annual rebalancing check in order
Most check-ins end at step four with no action needed. Many investors rebalance once a year or when an asset drifts more than about 5 points off target.
Instead of selling, you can often rebalance by directing new monthly ___ into whichever asset has fallen behind.
Steering fresh money at the laggard rebalances gradually with no selling. It's often simpler and, depending on your country's rules, it can avoid triggering taxable sales.
Stocks just crashed 30% and rebalancing now says 'sell safe bonds, buy stocks'. Most people hesitate. What is this feeling?
Everything useful in rebalancing feels wrong in the moment, which is why it's a rule and not a mood. Investors who rebalanced into the 2009 lows bought near generational bottoms without predicting anything. 🐜
The rest of this unit
The mix of stocks and bonds decides more than any hot pick ever will.