by Erik Van Tongerloo

Created on: October 15, 2009   Last Updated: October 18, 2009

Creating a healthy portfolio which fits your needs was already difficult. You need money for short-term and long-term goals and we never know when it is the right moment for buying and selling. We don't have a crystal ball which shows us the future of our investments. The only thing we know is that you make the highest profit if you buy low and sell high. Diversification is the key to have success.

Your risk tolerance, your age and your future goals are important issues for your investment portfolio. You have determined your investment profile and you know the right mix of your investment instruments you need for a healthy investment portfolio. You started with the right mix in cash, bonds, shares, mutual funds and some other assets and you probably think you will reach the desired returns. This is certainly wrong because the returns of every investment instrument are different and may cause your investment portfolio to not conform with your investment profile anymore.

Rebalancing your investment portfolio is necessary and needs to be done at least once a year and it is sometimes recommended to do this more frequently. You can best set a fixed date to check your investment portfolio and to take actions for rebalancing. Maybe you have difficulties to understand why you need to rebalance. There are two important reasons why you have to rebalance : your age and your investment profile. The returns of your investments are different and you need to rebalance for keeping your investment portfolio healthy or your investment strategy is changed because you want to lower your risk because you come nearer to the age of retirement.

Rebalancing your investment portfolio is not an easy job. It is easy to understand you need to buy and sell investment instruments to maintain the right mix but it is often a difficult task which assets you sell and which you buy. It is more complicated than creating a healthy portfolio and many investors make the wrong decision by keeping their best performers.

For example, you started with 20% cash, 30% bonds and 50% stocks. It is possible you reached a high return with your stocks and your other investments dropped or raised only a little bit. In this case your investment portfolio is not healthy anymore. Maybe you have now an investment portfolio with 20% cash, 20% bonds and 60% stocks. Your risk profile is much higher and you need to rebalance for lowering your risk profile.

It is necessary to sell some stocks and buy bonds to get back

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