When to rebalance and baseball analogy by Ken Mahoney

The general rule of thumb is that you should rebalance your asset allocation when your assets drift 5% or more away from your original allocation plan. A portfolio that is too heavily weighted in one area can be dangerous because the economy moves in cycles, which means your stock holdings could end up plunging so deeply that moving your portfolio back to its original allotment might take years, or might never happen.

Example: Tim Middleton, in his MSN article Spring Training for Your Portfolio in February 2007, compares portfolio rebalancing to bunting in baseball. By re-balancing you may not knock the ball out of the park, but by making small adjustments you’ll gradually move your assets toward home plate, and eventually you’ll score that big winning run.

Re-balancing helps take the emotion out of investing also. Instead of following the herd and selling when others are selling, or buying when everyone else is buying, you can become a contrarian—a maverick investor.

That is, you can zig while the market zags and vice versa. So often, when the market or an industry is doing poorly, there are panic sell offs by those with “weak stomachs.” This is the time when “long-term” investors, like Warren Buffet, step in and buy up the bargains.

While re-balancing is not a guarantee against loss, it:
Ensures that you’ll be buying low and selling high
Reduces volatility in your portfolio
Gives you a sense of consistency
Offers a process in which emotion and guesswork are eliminated