Rebalancing
The process of realigning portfolio weightings by periodically buying or selling assets to maintain target allocation.
Definition
Rebalancing is the process of realigning the weightings of a portfolio by periodically buying or selling assets to maintain the original desired level of asset allocation. Over time, market movements cause portfolio allocations to drift from their targets — a 60/40 stock/bond portfolio might become 70/30 after a stock market rally. Rebalancing involves selling some stocks and buying bonds to return to the 60/40 target. This disciplined approach forces investors to sell high and buy low. Common rebalancing strategies include calendar-based (quarterly or annually) and threshold-based (rebalance when allocation drifts more than 5% from target). Rebalancing maintains the intended risk level of the portfolio.
Related Terms
Asset Allocation
The strategy of dividing investments among different asset categories like stocks, bonds, and cash.
InvestingPortfolio
A collection of financial investments like stocks, bonds, cash, and other assets held by an individual or institution.
InvestingDiversification
Spreading investments across various assets to reduce risk.
TradingRisk Management
The process of identifying, assessing, and controlling threats to an investment portfolio.