Monday, May 24, 2010
Buy Low, Sell High
I rebalance my portfolio whenever it needs it. Each month I develop a balance sheet and I check to see how far out of whack my actual investment allocation is relative to my “ideal.” If there is a large enough difference, I sell whatever I have too much of and buy whatever I need more of.
How do imbalances occur? Either an asset class has risen more than others (not a bad problem to have), or has fallen more than others. Sometimes one asset class rises while another falls. However it happens, when a significant imbalance occurs, I rebalance by selling the one that has made relatively more money (which is selling high, more or less) and buying the laggard (buying low.)
I try to keep as much of my balancing in my tax-deferred accounts to avoid immediate capital gains taxes. I also hold down fees and expenses by utilizing mutual funds (mostly index funds) rather than individual stocks. On Wednesday I’ll explain my preference for mutual funds over individual stocks.