If you don’t have the cash to invest more, then do this: Rebalance
Question: My wife and I follow your advice to own a well-diversified portfolio that fits our particular situation. You always say that investors should buy low and sell high and view stock market declines as good buying opportunities. But what money do we use to buy low? We don’t have extra money lying around to invest. Do we sell some of our investments in order to buy others or what?
Ric: That’s a great question. If you don’t have any money to do that, do this: Rebalance your existing account. Rebalancing takes advantage of the fact that some assets have fallen in value more than others. As a result, your asset allocation is out of balance.
For example, say you wanted a 50/50 split between stocks and bonds. But due to recent stock market declines, your allocation is now 40/60. To fix this, you’d rebalance – selling some of the bonds and buying some of the stocks. This will restore your portfolio to its original 50/50 allocation.
Thus, rebalancing has you sell some of your overperformers and buy some of the underperformers. This has the effect of selling assets that are higher in value and buying assets that are lower in value – essentially, buying low and selling high!
Note that the strategy might generate a tax liability for taxable accounts. And of course, there’s no guarantee that rebalancing, or any strategy will prove successful.
Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.