If you hold more than one position in different assets, you got yourself a portfolio.
It is a good idea to re-balance if from time to time. Its main benefit is that it allows you to know which one of your assets is “on sale”. Here’s an example:
You heard that when stocks go up, gold goes down and vice versa. So, in order to minimize risk, you buy them both. The reason you bought them both is that you know they both will perform better than holding cash. You decide that a good balance for them is to be 50/50: 50% stocks and 50% gold.
So, you have at the beginning 5,000 worth of stocks and 5,000 worth of gold. 10k portfolio value.
After a while, the worth of your stocks is 7,000 (+40%) and the worth of gold is 4,500 (-10%). 11,500 portfolio value. The new proportion is (almost) 60/40)
You might want to re-balance: selling the highly priced stock and buying the low priced gold, so that their proportion in your portfolio which is your exposure to them, remains 50/50. Half of 11,500 is 5,750 so you sell 1,250 of stocks and exactly that amount of gold. You have now 5,750 of stock and 5,750 of gold (4,500+1,250). And still, 11,500 portfolio value.
Should the stock price go down (-40%) and gold go up (+10%) in the next swing (whenever it is), here is what happens:
5,750 * (1-40%) = 3,450 stock
5,750 * (1+10%) = 6,325 gold
Total portfolio value with re-balancing = 9,775
If you hadn’t re-balanced:
7,000 * (1-40%) = 4,200
4,500 * (1+10%) = 4,950
Total portfolio value without re-balancing = 9,150
Re-balancing added in this example 6.8% return to your portfolio.
Get to know the assets at your disposal and how they behave relative to each other and to external conditions. Your portfolio will be thankful.
Interested in learning more? This can help.