This is where asset allocation comes into play. The “general” rule on social media is to have an emergency fund, then invest the rest in 100% S&P500 index funds. We know not to touch the emergency fund. But, if your investments are 100% equity (stocks in the S&P500) how do you rebalance?

Asset allocation adds in a cash and bond position to your investment portfolio so you have three areas to invest your money; cash=opportunity funds, bonds=income, and stocks=appreciation/growth. Everyone’s allocation should be unique to their risk tolerance and your portfolio should be rebalanced periodically (every 6 months or annually works well).

We have a 15% cash, 15% bond, and 70% stock allocation. As stocks were going up in 2020, rebalancing told me to sell stock positions and rebalance my cash and bond positions. As stocks tanked earlier this year, my rebalance had me buying more stocks and reducing my cash and bond positions.

Asset allocation follows buffets, be fearful when others are greedy and greedy when others are fearful. You can never time the market efficiently and emotions always come into play. But, having an asset allocation in place and rebalancing to the set allocation removes all of that. You simply sell/buy what is needed to get back into balance.