Portfolio Rebalancing
The process of realigning portfolio weights back to a target allocation by selling overweight assets and buying underweight ones.
Over time, different assets grow at different rates, causing your portfolio to drift from its target allocation. If stocks outperform bonds for several years, your 80/20 portfolio might become 90/10, exposing you to more risk than intended. Rebalancing restores the original allocation, enforcing a disciplined "sell high, buy low" behavior. Common approaches include calendar-based rebalancing (quarterly or annually) and threshold-based rebalancing (when any asset class drifts more than 5% from target). Tax implications matter — rebalancing within tax-advantaged accounts avoids capital gains taxes.
Example
Target: 70% stocks / 30% bonds. After a bull year, stocks grow to 82%. You sell 12% of stocks and buy bonds to return to 70/30.
Related terms
Asset Allocation
The strategy of dividing investments among different asset classes — stocks, bonds, real estate, cash — to balance risk and return according to your goals and risk tolerance.
Diversification
The practice of spreading investments across different assets, sectors, and geographies to reduce the impact of any single investment's poor performance.
ETF (Exchange-Traded Fund)
A fund that holds a basket of assets (stocks, bonds, or commodities) and trades on a stock exchange like an individual stock.
Dollar-Cost Averaging (DCA)
An investment strategy of regularly investing a fixed amount regardless of market price, reducing the impact of volatility over time.