On a totally unrelated note, today's Dilbert reminded me of an editing job I did for a real estate magazine that had been translated from Thai into English. (I can only read English.) It was about a swimming pool, and it had the phrase "dirty suck hole." In context I knew it was a drainage system, but I nonetheless added "dirty suck hole" to my vocabulary and use it often.

Scott: These investment discussions that you have started coming up lately are boring and go nowhere...so let me say this - "Stick to funny blogs, Monkey Brain"...

I'm gonna go completely in the opposite direction on this:

Don't invest for the future. Here's why:

The average death age is what...70-ish? Maybe if you're lucky, you'll make it to 80? Chances are, by that time, you're drooling on yourself in a nursing home. What good will the money be to you then? Except to prolong your misery, maybe?

I say spend your money now while you are phsyically and emotionally able to do so. If you want to go visit the Vatican and have a peep at the Pope -- do it. If you want to go climb Mt Fuji and yell "Saporo!" -- do it. If you want to sail single-handedly around something -- do it.

Get the picture?

The time to get motivated -- or at least wish you could get motivated -- is not when your unable to care for yourself. Okay, picture time: You're a retired late-60s, early-70s something, and now you want to go discover yourself. Problem is, your memory is failing, and the old joints just can't support you anymore. Do you honestly believe that your "loved ones" will say, "Geee, Dad (or Grandpa) wants to go to Nepal. Let's make it happen!" Not likely. It's more realistic that they will say, "Is that silly old geezer crazy?! He wants to climb Everest! Someone calm him down before he spends all of our inheritance!"

And, that -- Ladies and Gents -- is the rub of it. Who are you really saving for? Yourself? Or your kids? I have kids. Personally, I don't plan to leave them a dime. Why? Because I don't want them thinking, "Woohooo! Easy street!"

People spend too much time worrying about their bank accounts. I know I did. I've spent most of my working life trying to build that elusive savings account, pumping up a 401K, and investing in stocks to hit the "big time". I worked 12-14 shifts in all conditions all over the world trying to achieve my "American Dream". And where did it get me? NOWHERE.

Well, that's not quite the truth, actually. It did land me in a hospital with a heart attack at age 41 due to exhaustion.

Take advice from someone who nearly lost it all trying to get it all: Get out and live. Speaking from first-hand experience, when you're lying on a hospital bed wondering if this is your last night on Earth, you realize that all the dollars in your portfolio won't buy you another minute.

You know what saved me that night? It wasn't money -- It was PRAYER. A lot of it (And good doctors too, I might add). I guess the "Man Upstairs" wasn't finished with me yet. I'm still here, and am able to be with my wife and kids. That's what matters. Flesh matters, not money -- real or imaginary.

Being with my family is more important than some scammer's investment strategy. Get out in live, people. Earn your money, and spend it seeing places and doing things. The true winners in life are those who finish with the most memories.

Your faith in "science" is touching.

The basic reasoning behind both dollar-cost-averaging and periodic rebalancing is that, when you do them both, you get a sort of automatic buy-low, sell-high strategy, and you get some medium-term protection from market volatility. In fact, simulations show that DCA actually improves your performance in volatile markets, mainly through buy-low.

Yes-- it's an imperfect, mechanical, and boring strategy, and it's easy to think of ways in which it can fail, but if you're not willing to spend a huge of time on tending your investments, it works as well or better than other, much more complex strategies. Remember, your financial strategy should strive to be the opposite of sex: if it's exciting, you're doing it badly.

Rebalancing your portfolio for the sake of rebalancing is not what I would do. If my portfoloio becomes more aggressive than my stomach can bear, then that's the sign for me to do something.

Be careful of mutual funds because the managers can actually change the risk profile of their portfolio without anyone becoming aware. ETF's make more sense, but, you still have to know how to diversify your portfolio to cushion the down markets, and hang on to profits.

It is starting to make more sense to keep money in mattresses because of the lack of oversight the SEC gives, except for !$%* of course.

As others have said, rebalancing when your asset allocation deviates significantly from your plan makes sense. Rebalancing purely based on a calendar schedule doesn't.

The main reason for the difference is that every time you rebalance, you incur fees and taxes, so the above really applies to non-retirement assets. If your money is in an employer-sponsored retirement plan (e.g. 401(k)), then rebalancing causes no tax hit and (assuming the plan isn't run by crooks) there should be no fees to move money between funds you already own.

So rebalancing on a schedule (yearly, quarterly, monthly, weekly?) won't hurt if you do it in a retirement plan, but it won't accomplish anything if your values haven't deviated from your plan. Doing it for non-retirement money, however, is going to end up incurring a lot of fees that will likely eat up any profit you might make - which is why you should only rebalance non-retirement holdings when you really need to, and not on a schedule.

What a strange question from an economics major. It's all about risk tolerance. The original portfolio should have been set up for a particular level of risk that the investor was willing to accept (with the idea that higher risk=higher reward). If the portfolio shifts "substantially" away from that risk profile, then it might be time to rebalance the portfolio. Now, I can't say what "substantial" is nor would I say that it makes sense to ALWAYS rebalance every year, but you're making standard economic theory sound like a conspiracy. Is that your goal?

Some wizard's hi-tect con works, for a time. but not for long. The random walk is the only thing proven to work over a long time. And thats a fact.

When I lived in China, and told hundreds of students that bombing their embassy was a mistake, I was sincere. Today that sounds naive.

First, let me say that once I thought about rebalancing I was never tempted to try it. Whether you should want to rebalance or not depends on why you believe that your different investments move in different directions or magnitudes, with some gaining more or less and others losing more or less (if this didn't happen, you would never need to rebalance). If you believe that prices fluctuate around a true value, i.e. a gain should be followed by a loss and vice versa, rebalancing constantly will increase the value of your porfolio (minus fees). If you believe that prices are driven by fundamentals and tend to be one direction over longer time periods, then rebalancing will minimize your gains and maximize your losses. If you believe that both of these types of price movements happen on a regular basis and there is no way to tell which kind of price movement is happening at the moment, then you'll never know whether it's better to rebalance at any particular moment or not.

Another example of the same silliness is Dollar Cost Averaging. For some reason financial planners tell people that it makes sense to invest slowly over a long period time. It makes you wonder if financial planners are just poorly educated, or purposefully misleading.

I can send you dozens of articles about rebalancing from the Journal of Financial Planning if you're really interested in digging into the topic. I think it's a no-brainer for tax-deferred accounts and should be done in taxable accounts but more care needs to be taken that taxes created aren't overriding the benefits of rebalancing.

One point that I don't see being made here is that rebalancing isn't necessarially to generate higher returns for you. buy and hold will likely outperform. Rebalancing in my opinion is more useful to protect on the downside and keep you invested through a rough patch, rather than having you end up going from a 60/40 portfolio to an 80/20 through a run up, and then suffering as you have a large value decline in the next bear market.

Isn't the purpose of re-balancing is to lock-in gains and buy-low?
If you think 70% stock and 30% bond was right balance for you and year later your stocks are 80% and bonds are 20% and 70/30 is still right balance for you, then by re-balancing you lock your gains from stock and buy bonds when they are cheaper.

I've set it up to have a certain balance. Any profit from one part that would pull it out of balance gets reinvested in the other part.
This to maintain a set level of security, a set margin between risk funds and stable funds (stock and bonds, etc.).

This has nothing to do with whether stocks do well one year or another, and everything with long term volatility as I see it strictly as a very long term investment, like decades.
I don't rebalance it to some number suggested to me each year by some "expert", I've a set distribution that's remained the same basically forever.

Simply put:
Any gain > x% on the high risk funds is reinvested in low risk funds. That's all.

The SEC says that "rebalancing tends to work best when done on a relatively infrequent basis."

http://www.sec.gov/investor/pubs/assetallocation.htm

Now since we've recently come to learnthat SEC employees spend the majority of their work day <a !$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*!$%*! !$%* from their office computers</a>, I would do the opposite of whatever they suggest.

And that's about as scientific of a recommendation as you can get when it comes to investing.

Rebalancing is pretty straightforward - you can figure it out yourself with a spreadsheet - no need to go to an expert. This website has a good take on rebalancing though - they only rebalance when the percentages get too out-of-wack rather than every year to lower the costs of rebalancing:
http://www.indexinvestor.com/

If you believe that stocks and bonds behave like these certain random variables, then rebalancing makes sense. Because you have set a target "expected return" and "variance" of your portfolio - and rebalancing keeps your portfolio on that expected course. However, in fact nothing behaves as nicely as the random variables, which is discussed in criticisms section of the Wikipedia article:

http://en.wikipedia.org/wiki/Modern_portfolio_theory