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When you invest periodically (for example, wages or dividends), it is wise to keep your portfolio in balance in line with your chosen risk profile.

Please note, the frequently mentioned “rebalancing premium” (buying low / selling high) actually does not exist (figure 8). Return is the highest on shares, but then you also have the highest volatility. Rebalancing from stocks to bonds feels like taking a profit, however, you move your money from higher returns with higher volatility (shares) to lower returns with lower volatility (bonds). In a stock market crash, rebalancing may even lower the low point, as the money you move from bonds to shares during the crash (to keep the asset allocation intact) will fall further as long as the stock market goes down. In such a case, it is better to do nothing at all for your own mood, until everything has recovered (after a few years).

By depositing only new investable money (dividend or external income) to asset allocation, you save transaction costs. If you want to take a more defensive approach, you can annually choose to only rebalance from shares to bonds (and not the other way around). This will further reduce volatility, but also the long-term return.

Withdrawal-only phase

In the withdrawal phase, it is advisable to rebalance annually to bonds on a fixed date, for example with a deviation >5%. Although this lowers the long-term return, it reduces the chance that you will run out of money earlier because of the lower volatility (in a bad market) when you withdraw 3% per year.

rebalancing.txt · Last modified: 2020/07/28 12:41 by dreas