Why Rebalance?
Primarily, portfolio rebalancing safeguards the investor from being overly exposed to undesirable risks. Secondly, rebalancing ensures that the portfolio exposures remain within the manager's area of expertise.
Assume that a retiree has 75% of his portfolio invested in risk-free assets, with the remainder in equities. If the equity investments triple in value, 50% of the portfolio is now allocated to risky stocks. An individual portfolio manager who specializes in fixed income investments would no longer be qualified to manage the portfolio as the allocation has shifted outside his area of expertise. In order to avoid these unwanted shifts, the portfolio must be regularly rebalanced.
Also, the growing portfolio proportion allocated to equities increases the overall risk to levels beyond those which are normally desired by a retiree. (For more, see "Rebalance Your Portfolio to Stay on Track.")
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