Rebalancing also helps you become a disciplined investor. Let’s say you have 65% of your investments in stocks and 35% in bonds. When your stocks are performing better than your bonds, it is tempting to want to let those securities be the bulk of your portfolio, however now your portfolio allocation may have changed to something like 80% stock, 20% bonds. This new allocation doesn’t stick to your original allocation strategy. You are taking on more risk and when those stock start to underperform your portfolio will take a larger hit than it would have if you would have rebalanced back to your original allocation. The same works if the opposite happens. If you’re a more aggressive investor, but bonds have been outperforming your stocks and are starting to become the bulk of your portfolio, rebalancing will make sure that you are still taking on the risk that you seek. Rebalancing prevents this and keep you disciplined. It forces you to buy things low and sell things high and it helps you stick to your investment objectives and principles. It also keeps your portfolio less volatile.
Rebalancing also helps investors stay on track. It gives investors a reason to review their portfolios on a consistent basis. Before you perform a rebalance, you should look at your portfolio, see if your investment goals have changed, review your investment strategy, and determine if you want to go in a different route or stick to your current strategy. This essentially helps your stay on track with your financial plan, which is another benefit of rebalancing. An interesting study on rebalancing can be found at: http://www.aaii.com/journal/article/the-advantages-of-diversification-and-rebalancing