Strategy
Rebalancing restores a portfolio's original target allocation by buying and selling asset classes that have drifted from their weights.
Rebalancing is the process of bringing a portfolio's actual allocation back to its target weighting. Because individual asset classes perform differently, the weights drift over time.
Example: a 70/30 portfolio (equities and bonds) may end up at 80/20 after a market boom. Rebalancing restores the original 70/30 target allocation.
Common methods are time-based (for example once a year), threshold-based (for example from 5% deviation), or via cash flows, directing new contributions into the underweight class. The last approach tends to avoid transaction costs and taxes.
Related terms
See taxes, dividends and allocation for your whole portfolio in one place.