Rebalancing
What Is Rebalancing?
Rebalancing is the process of adjusting the allocation of assets in an investment portfolio to maintain a desired investment strategy or target asset mix. Over time, market movements can cause portfolio allocations to shift away from their intended proportions.
Rebalancing restores the original balance among different asset classes.
Why It Matters
Rebalancing helps investors manage risk and maintain their long-term investment strategy. Without periodic adjustments, a portfolio may become overly concentrated in certain assets, potentially increasing risk.
Regular rebalancing ensures that portfolio allocations remain aligned with an investor’s financial goals and risk tolerance.
How Rebalancing Works
Investors rebalance by:
- selling assets that have grown beyond target allocation
- buying assets that have fallen below target allocation
Rebalancing may occur on a schedule, such as annually, or when allocations move beyond certain thresholds.
Example
An investor’s portfolio originally consists of 60% stocks and 40% bonds. After a strong stock market rally, the portfolio shifts to 75% stocks and 25% bonds. The investor sells some stocks and buys bonds to restore the original 60/40 allocation.
Rebalancing vs Diversification
- Rebalancing adjusts portfolio weights to maintain a strategy.
- Diversification spreads investments across different assets to reduce risk.
FAQs About Rebalancing
How often should investors rebalance?
Many investors rebalance annually or semiannually.
Does rebalancing guarantee better returns?
No. It primarily helps manage risk and maintain asset allocation.
Can rebalancing trigger taxes?
Yes. Selling assets in taxable accounts may create capital gains taxes.
Related Terms
