Think of a portfolio like the toppings on a supreme pizza.
The toppings represent the various categories of the market. For example, cheese might be the biggest, most reliable companies in the U.S.; pepperoni might be energy stocks; sausage might be technology; olives might be international companies; anchovies, emerging markets; etc. The job of Nest Financial is to find or build a pizza that is best for you. It has a mix of toppings that you are both comfortable with and accomplishes the goals we have established. Rebalancing is simply making sure the toppings on the pizza maintain the right proportions.
This can be challenging, as our pizza toppings tend to have a mind of their own. For example, if we decide that we want 10% of our pizza to be topped with pepperoni and 8% with olives, the pepperoni market might do really well and grow to 12%. Meanwhile, the olive market might struggle and only earn 8%. In that case, we’ll sell some of the pepperoni for a profit and buy some olives while they are cheap. In investment terms, rebalancing has been shown to provide a significant boost in performance over time.
