What does rebalancing in a portfolio involve?

Rebalancing a portfolio involves adjusting the weight of various assets to maintain a desired level of risk and to align the portfolio with the investor’s long-term objectives and risk tolerance. Over time, due to market fluctuations, certain assets may appreciate or depreciate significantly, which can cause the original asset allocation to drift.

By rebalancing, an investor ensures that their portfolio reflects their intended asset allocation strategy, which could include a mix of stocks, bonds, and cash. This process may require selling assets that have grown to represent too large a portion of the portfolio and buying more of the underrepresented assets to return to the original or target allocations. This disciplined approach helps manage risk and can enhance potential returns over the long term.

Investing all assets into high-performing stocks, eliminating low-performing assets, or buying more of the most volatile assets does not align with the strategy of maintaining a balanced and diversified portfolio, which is central to the concept of rebalancing.