Buying low and selling high is the holy grail of investing. Rebalancing your investment portfolio can help you do this.
It is what drives millions of investment choices everyday. Yet very, very few people ever get to experience the joy of seeing this done on their own investments, and well.
Re-balancing your investments is an easy way of buying low and selling high without greed or emotion ever coming into the equation. This is something that is near impossible to achieve on your own, but all too obvious when you know how and have the discipline to stick to it.
To re-balance your investments you must first have a starting point. That starting point is an allocation of assets that you will call your standard, or model allocation. So, for example, you may have a certain percentage of your portfolio invested in Bonds, Gilts, UK Equities, Global Equities, Emerging Markets, Property and Commodities.
Once you know what percentages to invest in each in order to achieve your ideal balance of risk and reward, you have a model allocation of assets.
Having invested these assets the actual live percentages will inevitably move around with the changes in markets that mean some will fall in value while other will rise in value. It may be that they all rise in value but at different rates over time. However, just like an overgrown garden, a bit of maintenance goes a long way. This unchecked growth may also result in your portfolio allocations being thrown out a little, where you may eventually have more than you bargained for in some sectors and less in others. This can leave you with a portfolio you never intended to hold.
In order to get back to your model percentage allocations you need to do a bit of portfolio maintenance. You will want to sell some assets that have gone up in value relative to the others and use the cash to buy some assets that have gone down in value relative to the others.
In essence this is re-balancing, using investment theory to systematically buy low and sell high, and maintain the balance of risk and reward within your portfolio at a level you are comfortable with over time.