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"Put all your eggs in one basket and - WATCH THAT BASKET"
(Mark Twain) |
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Over time, any investment plan will become distorted as one class outperforms others. Periodic re-balancing maintains the original risk-reward target for the plan. Because re-balancing enforces a buy low, sell high approach, it results in a positive performance gain over time.
On a quarterly basis, the account shall be reviewed to determine if the portfolio composition is consistent with the asset allocation variance within the limits established. If not, it is rebalanced to maintain the risk/reward relationship implied by the stated long-term objectives. This policy may necessitate the purchase and/or sales of securities, which might create additional transaction costs to the account and the recognition of capital gains and/or losses.
In summary, the most essential aspect of developing an investment policy that addresses more than just your immediate concerns is determining how your assets should be allocated among major asset classes. By diversifying appropriately you take advantage of the current and expected economic climate, while ensuring that you will generally have some assets that perform well regardless of changes in economic conditions.
