Rebalancing
The process of restoring a portfolio to its target asset allocation by selling outperforming assets and buying underperforming ones.
What is Rebalancing?
Portfolio rebalancing is the process of realigning the weightings of a portfolio's assets to restore the original or desired target allocation. Over time, assets grow at different rates: a 60/40 stock/bond portfolio may drift to 70/30 after a strong equity bull market. Rebalancing involves selling some of the overweight asset (stocks) and using the proceeds to buy the underweight asset (bonds) to return to 60/40. Rebalancing can be done on a calendar schedule (quarterly, annually) or triggered by a threshold (when any asset class deviates more than 5% from target). Regular rebalancing enforces a buy-low/sell-high discipline and maintains the investor's intended risk exposure.
Example
An investor starts 2023 with a $100,000 portfolio: 60% stocks ($60,000) and 40% bonds ($40,000). By end of 2023, stocks gain 26% and bonds gain 5.5%. Portfolio: stocks $75,600 (68.3%), bonds $42,200 (31.7%). To rebalance back to 60/40, the investor sells $9,320 of stocks and buys $9,320 of bonds.
Source: Vanguard — Portfolio Rebalancing