Many advocate keeping a portfolio of bonds and stocks, and rebalancing them regularly. While reading the Four Pillars of Investing, I discovered a very good example of diversification and rebalancing. I will replicate it here. Playing the long game (Chapter 14) In order to understand rebalancing, let’s consider a model consisting of two risky assets; call them A and B. In a given year, each asset is capable of having only two returns: a gain of 30% or a loss of 10%, each with a probability of 50%. You can simulate the return for each simply by flipping a coin. Half the time you’ll get a return of  30%, and half the time you’ll get 10%. The expected return of this “investment” is 8.17% per year. That’s because, on average, you’ll get one year of  30% for every year of  10%: 0.9 x 1.3 = 1.......