Definition
Rebalancing is the process of realigning the weightings of assets in a portfolio to maintain a desired level of asset allocation. As different assets perform differently over time, the portfolio drifts from its targets. Rebalancing involves selling outperformers and buying underperformers to return to target weights. This naturally enforces buying low and selling high discipline. Rebalancing can be done on a calendar basis (quarterly, annually) or when allocations drift beyond set thresholds.
Example
A 60/40 portfolio after a bull market drifts to 70/30. Rebalancing sells stocks (at high prices) and buys bonds (at relatively low prices) to return to 60/40, reducing risk and potentially improving returns.
FAQ
What is Rebalancing?
Periodically adjusting portfolio weights back to target allocations.
Why is Rebalancing important?
Rebalancing helps investors evaluate investment strategies and make more informed decisions.