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What is rebalancing?
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Rebalancing is the process of adjusting an investment portfolio to restore the original asset allocation. Over time, the value of different investments can change, causing the portfolio to drift away from its intended balance. Rebalancing brings the portfolio back in line with the chosen strategy.
Rebalancing helps investors maintain their desired risk level and investment strategy.
As financial markets move, some assets in a portfolio may increase in value faster than others. This can lead to a higher concentration in certain investments than originally planned. Rebalancing involves selling a portion of assets that have grown and buying assets that have become relatively smaller in the portfolio.
By regularly rebalancing, investors aim to maintain diversification and keep the portfolio aligned with their long term goals and risk tolerance. Many investors rebalance their portfolios periodically, such as once or twice per year.
Short example:
Suppose an investor creates a portfolio consisting of 60 percent shares and 40 percent bonds. Over time, strong stock market performance causes the share portion to grow to 70 percent of the portfolio.
To restore the original allocation, the investor sells part of the shares and buys additional bonds until the portfolio returns to the 60/40 balance.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.
