How to Rebalance Your Portfolio in a Lofty Market

Olivier Le Moal/ShutterstockIf you’ve chosen a target asset allocation—the mix of stocks, bonds, and cash in your portfolio—you’re probably ahead of many investors. But unless you’re investing in a set-and-forget investment option like a target-date fund, your portfolio’s asset mix will shift as the market fluctuates. In a bull market you might get more equity exposure than you planned, or the reverse if the market declines.Rebalancing involves selling assets that have appreciated the most and using the proceeds to shore up assets that have lagged. This brings your portfolio’s asset mix back into balance and enforces the discipline of selling high/buying low. Rebalancing doesn’t necessarily improve your portfolio’s returns, especially if it means selling asset classes that continue to perform well. But it can be an essential way to keep your portfolio’s risk profile from climbing too high. Where and How to RebalanceIf it’s been a while since your last rebalance, your portfolio might be heavy on stocks and light on bonds. A portfolio that started at 60 percent stocks and 40 percent bonds 10 years ago could now hold more than 80 percent stocks.