You can rebalance your portfolio in
different ways. All these approaches work, but you may
feel more comfortable with one than another.
1.
One way
to rebalance is to sell off a portion of the
asset class that has increased most in value
and reinvest those profits in the lagging asset
class.
2.
Or, you
can change the way your future contributions
are allocated, putting more money into the lagging
asset class until things are back in balance.
3.
You can
also add new investments to your portfolio in
the lagging asset class and funnel your contributions
to those investments.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
While all three methods
work, many investors are uncomfortable with the first approach
since it seems illogical to sell investments that are doing
well to buy those that are not. Remember, though, that
no asset class is the strongest performer year in and year
out. It may be smarter to sell at a high price than to
watch the value of an investment drop.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 