Investors construct their portfolios based on investment goals and risk tolerance by assigning appropriate weights to different asset classes and categories (or how much dough should go to each class). Over time, as market conditions change, investment performances among asset classes change but not in the same amount at the same time. Some assets may grow faster and become over weighted, while others fall behind and become under weighted. As a result, the risk profile of the portfolio is altered (you have too much invested in certain classes). Without proper adjustment, the current portfolio would have a higher or lower risk depending on the relative values of over weighted assets and under weighted assets. Portfolio rebalancing brings a portfolio’s current asset allocation back to the original mix so that investments can be realigned to initial investment goals to maintain an appropriate risk level.
If the thought of your 18-year-old on the loose with plastic in hand terrifies you, you likely share the sentiment of many parents in the same situation.
Lawmakers seem to agree as well, which is probably why the Credit CARD Act of 2009 has made it much harder for young adults age 18 to 20 to obtain their own credit card.
Under this new act, anyone under the age of 21 has to meet a few extra requirements before being granted a line of credit. They either have to either prove their income is high enough to pay off the bill or have someone over the age of 21 with sufficient income and credit co-sign (i.e. Mom or Dad).
Investing incurs risks because it is impossible to correctly predict future returns of any investment every time (if you can let me know!). However, what is certain is that not all investments perform the same way under the same market conditions; some zig while others zag. Investors may try to pick one investment asset over the other by non-diversifying, but any wrong pick would result in lower returns or losses. Portfolio diversification reduces investment risk by eliminating such possibilities through investing in assets of different expected returns. The expected return on a diversified portfolio will always lower than the asset with the highest expected return but higher than the asset with the lowest expected return. In other words – it evens out your highs and lows for a more even return.
Ever go food shopping and think you need only a few items?
You do your shopping, thinking you didn’t buy much and then you get to the register.
The amounts on the register screen start piling up.
When your order total pops up you do a triple take saying “what?!?”
You’ve just spent way more than you wanted. What’s worse is you get home and you don’t really have much food for meals. Ends up you have a lot of snacks and such.