Rebalancing helps manage risk by ensuring that your portfolio doesn’t become overly concentrated in one asset class, which could expose you to higher volatility and potential losses.
It enforces discipline by prompting investors to buy low and sell high. When rebalancing, you’re essentially selling assets that have performed well and buying assets that are relatively undervalued.
Contrary to the intuitive notion of “letting winners run,” studies have shown that periodic rebalancing can actually enhance returns over the long term by capitalizing on mean reversion and market inefficiencies.
Rebalancing helps keep your portfolio aligned with your investment goals and risk tolerance, ensuring that you stay on track to meet your financial objectives.