Take advantage of market movement: While staying in your comfort zone July 10, 2015Effect of Rebalancing This is a simple 2 step process, but if you’re not doing it, you’re missing out.Step 1Fill out a risk tolerance questionnaire. This helps to quantify your feelings about investing. We use this as well as other factors to find an appropriate asset allocation you can live with during good times and bad.Step 2As market forces change the relative value of portions of your portfolio buy and sell investments to bring you back to your proper allocation while capturing gains and buying when and where prices are low.Here is a simple example:An investor’s proper allocation is 40% mutual funds and 60% bonds. (40 / 60)In 2002 the investor owned 10,000 shares of mutual funds that were valued at $40 per share and 600 $1,000 bonds for a total value of $1,000,000.In 2003 the value of these mutual funds fell to $20 per share and the value of the bonds remained constant. This caused the allocation to become 25% mutual funds and 75% bonds. We sold 120 bonds at $1,000 each and used the proceeds to purchase 6,000 additional shares of mutual funds, bringing the allocation back to 40/60. The total value was then $800,000.In 2004 the share price of the mutual funds came back to $40 per share changing the allocation to 57%/43%. We then sold 4800 shares of mutual funds and used the proceeds to purchase 192 bonds. The portfolio was then worth $1,120,000 and the allocation was once again restored to 40%/60%. If we had done nothing the portfolio would have been worth $1,000,000 but because of rebalancing the portfolio gained 12% and maintained the investor's correct risk tolerance.I hope this tip can help you and those you care about.