After several years of strong equity markets, I suspect many of you are
likely sitting on portfolios that look very different from what you
intended. A sensible 60:40 split between equity and debt five or six years
ago may have pushed you closer to 75:25 or even 80:20. Your portfolio
changed without you changing anything. This silent drift is exactly why our
cover story focuses on rebalancing, a topic that rarely receives the
attention it deserves. The strange thing about rebalancing is that almost
every investor understands the logic. Restore your original allocation.
Sell what has risen. Buy what hasn’t. Lock in gains. Maintain your risk
level. Simple in theory. And yet, when the moment arrives to actually do
it, something feels deeply wrong. Consider what rebalancing asks of you
right now. It asks you to sell some of your equity holdings, the very
investments that have made you feel like a smart investor, and move that
money into debt funds, which feel dull by comparison. Every instinct
rebels. Why sell winners? Why shift money from what is working to what
isn’t? The answer, of course, is that you are not predicting the future;
you are managing risk. Knowing this is one thing, feeling it is another.
This is the central challenge of rebalancing. It requires you to act
against the grain of your own psychology. When equity markets are soaring,
rebalancing feels like leaving money on the table. When they’re crashing,
it feels like catching a falling knife. There is no comfortable time to
rebalance. The right moment always feels like the wrong moment. I’ve been
writing about investing for three decades now, and I’ve observed that this
psychological barrier is far more significant than any technical
complexity. Investors will spend hours researching fund managers, comparing
expense ratios, and debating large-cap versus flexicap—activities that have
a marginal impact on long-term outcomes. But they will avoid the 10-minute
task of checking whether their portfolio has drifted from its target
allocation, because confronting that drift means confronting an
uncomfortable decision. The financial services industry only makes it
harder. There’s no commission in telling someone to sell a well-performing
fund and buy a boring debt fund. No headlines are written about investors
who maintain their asset allocation through market cycles. The incentives
all point toward action, toward new funds, toward the next opportunity.
Rebalancing is the opposite of exciting, which is precisely why it works.
What makes this moment particularly important is the extent of the
accumulated drift. The equity rally of recent years has been substantial
enough that even disciplined investors may find their portfolios carrying
significantly more risk than they intended. This isn’t a problem when
markets continue rising. It becomes a serious problem when they don’t. The
investor who thinks they have a moderate-risk portfolio but is actually
running an aggressive one will discover this mismatch at the worst possible
time, during the next significant correction. Our cover story lays out the
mechanics and the evidence. Twenty years of data across eight market cycles
make a compelling case. But the mechanics were never the hard part. The
hard part is bringing yourself to act on what you know. It means selling
something that has made you money to buy something that hasn’t. It means
trusting a process over a feeling. The best investment decisions often feel
wrong at the moment. That discomfort isn’t a sign that you’re making a
mistake. It’s usually a sign that you’re doing exactly wh
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