Portfolio rebalancing is critical to long-term investment success

Establishing an ideal asset allocation (i.e., the mix of assets across stocks, bonds and cash) is only the first important step in creating and maintaining an effective investment portfolio. Regularly revisiting your portfolio and rebalancing your assets to your target allocation is important to keep your plan on track to your goals, especially amid rapidly changing market conditions.

Done properly, rebalancing involves:

• Moving existing assets from high-performing investments into lower-performing investments with upside potential, or
• Changing the way new assets are allocated to put more into lower- performing investments.
  
  If you’re like many investors who shifted to more conservative portfolio allocations over the past six months due to market volatility, rebalancing back to your target asset allocation now can help position your portfolio for the economic recovery ahead.

Many investors know the best time to buy shares in stocks or mutual funds is when they are cheap and expected to rise in value. There are many investors who see both factors in play today. However, the volatility we’re experiencing as the markets recover has some investors understandably cautious.

Dollar cost averaging is the principle of investing the same amount of money in a particular security at regular intervals over an extended period of time. By doing so, you essentially force yourself to purchase fewer shares when the security is performing well and more shares when it is undervalued. This strategy can be extremely effective in volatile market conditions as it helps mitigate the effects of market fluctuation on average share price while gradually increasing an investor’s position in a security.