Buy low, sell high – the most common tenet of the investment world. Sounds very basic but how does one do this in the absence of a crystal ball? Well, there is one technique – rebalance your portfolio. Not only this lends you a discipline that leads to buying low and selling high, it also ensures that your portfolio reflects your investment goals and your risk profile.

Let us take a simple example of this. Say on Jan 1, 2010, your target asset allocation was 30% fixed income and 70% equity and you had $100,000 to invest. You decided to implement your portfolio using ETFs AGG, a bond ETF that represents the total United States investment-grade bond market and SPY, another ETF, which represents S&P 500 Index. However, by the middle of Jan 2011, AGG had gained ~2.7% whereas SPY had gained ~13.50%. This resulted in your portfolio being 28.00% in AGG and 72.00% in SPY. So what do you do? You sell the extra 2% in SPY and buy AGG with that cash. Now your portfolio is back to its target of 30% in fixed income and 70% in equity. And in the process, you have taken the gains that SPY rise had given and bought AGG which had performed less spectacularly than equities.

So, why rebalance now? The bounce in stocks in 2010 and drop in bond prices in last few months would have definitely had its impact on most of the portfolios. Also, there are still a number of investors who are in cash. This can be a good opportunity to decide how you would like to deploy and invest that cash. There is no perfect time to rebalance but once a year is a good frequency for most investors. This gives them a discipline and an opportunity to review their asset allocation. An asset allocation reflects each investor’s personal financial situation, their investment goals and their risk profile among other things. As time passes, we should make time to review whether our asset allocation still represents our current personal and financial situation correctly. A time allocated for rebalancing can give a framework in which to make this decision. It is almost like setting the clock in spring and fall. Make this a habit and you will be glad you did it.

— Lavina Nagar

— Lavina is a financial planner and founder of Maya Advisors, Inc. She can be reached on 650.704.3074 or 

Disclaimer: This article is for information-purposes only, and may not apply to your unique situation. Nothing in this should be interpreted to be a recommendation to anyone to purchase, sell or hold any security or product. It does not replace a lawyer, accountant, financial planner, or other professional advice.