investing
Portfolio Rebalancing
Rebalancing is the process of realigning the weights of portfolio holdings back to a target asset allocation — selling assets that have grown above target and buying those that have fallen below.
Over time, a strong stock market run can shift a 60/40 portfolio to 75/25, taking on more risk than intended. Rebalancing sells some equities and buys bonds to restore the 60/40 target.
Common rebalancing approaches: calendar-based (annually, semi-annually), threshold-based (when any asset class drifts more than 5% from target), or a hybrid. Tax-efficient rebalancing uses new contributions to buy underweight assets rather than selling overweight ones.
Related terms
- Asset Allocation
- Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.
- Index Fund
- An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
- Dollar-Cost Averaging (DCA)
- Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.
Frequently asked questions
What is Portfolio Rebalancing?
Rebalancing is the process of realigning the weights of portfolio holdings back to a target asset allocation — selling assets that have grown above target and buying those that have fallen below.