Investment Portfolio Rebalancing
Risk / Reward
Investors seek rewards, but must be mindful of risk. Storm clouds surround a rainbow with its proverbial pot of gold. There is always a tradeoff. You must assess your risk tolerance. Then you can take a rational approach to establish an investment portfolio that matches your unique situation.
Modern Portfolio Theory provides a framework to construct an optimal portfolio from available investments. The magical result is that a blend of risky and less risky investments results in the best possible expected reward for a given level of risk. The sweet spot (gold star) lies on the "efficient frontier." The 1990 Noble prize in economics was awarded for this concept.
A portfolio will deviate from its sweet spot from time to time. An investor should restore an "out of balance" portfolio (silver star) to "balanced" (gold star) when the imbalance is too large. A portfolio rebalance dictates selling some assets and buying others. This Balancing Act imposes a "buy-low sell-high" discipline that is not influenced by emotion.