Portfolio Rebalancing

Year-end is always a time of reflection, a rare opportunity where the usual psychological boundaries of time crumble. For a couple weeks, the tyranny of the present yields to a heightened consideration of the past and the future. This rift in our everyday thought patterns leads many investors to ponder the composition of their portfolios, making this time of year the primary season for portfolio rebalancing.

While the concept of portfolio rebalancing is simple, many investors struggle with the practical execution. The whole idea of investment is deploying the surplus fruits of our labors in productive assets that can earn returns for us. We all work and use the resulting earnings to finance our lifestyles. And if we prudently live within our means, we are blessed with leftover capital after all expenses. Rather than let it sit idle, we invest it.

But it is foolish to invest all this hard-earned surplus capital in one place. Diversification is absolutely critical for investment, it radically lowers the risk of catastrophic losses. This principle is nothing new, some thirty centuries ago the ancient Israeli King Solomon wrote, “Cast your bread upon the waters, for you will find it after many days. Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.” (Ecclesiastes 11:1-2)