Regular contributions and rebalancing

Investing a fixed amount every month and returning to your mix once a year are two simple habits that take the emotion out of decisions.

Two of the most common questions in investing are "is it a good time to get in?" and "what do I do when something has risen a lot?". Two simple habits answer both without having to guess the market: regular contributions and rebalancing.

Regular contributions (dollar-cost averaging)

It means investing the same amount at set intervals (for example, every two weeks or every month), regardless of whether the market is up or down. When prices are low, your money buys more; when they're high, it buys less.

All at once or little by little?

If you have a large amount available, studies show that, since the market rises more often than it falls, investing it all at once tends to give slightly more return on average. But investing gradually reduces the regret of getting in right before a drop. For most people, who invest part of their salary each month, regular contributions are simply the natural thing.

Rebalancing

Over time, whatever rises most ends up weighing more in your portfolio and your mix drifts from the one you chose. Rebalancing means returning to your target mix: selling a bit of what rose and buying what lagged (or directing your new contributions to what fell behind).

Rebalancing forces you to do what's emotionally hard: sell a little of what's expensive and buy what's cheap. And it keeps your risk at the level you chose: without rebalancing, after several good years you could have far more in stocks than you'd stomach in a drop.

How often to rebalance

• By calendar: once a year, on a fixed date.
• By bands: when a part drifts more than a certain margin (for example, 5 points) from its target.
• With contributions: direct new money to what lagged, without selling (and without paying taxes on sales).

Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.