Rebalancing
Also called: portfolio rebalancing, rebalance
Bringing a portfolio back to its target mix by selling some of what has grown and buying what has shrunk, or by directing new money to the underweight part.
Market moves make a portfolio drift from its planned allocation. After a share rally it holds more equity, and more risk, than intended. Rebalancing restores the planned level of risk.
It can be done on a calendar, when drift passes a set band, or both. Using contributions and withdrawals to rebalance reduces selling, costs and tax.
Example
A 60:40 portfolio drifts to 67:33 after a rally. Rebalancing moves about 7% of the portfolio from equity to fixed income.
Learn more in these lessons
- Portfolio rebalancingWhat is rebalancing, and how often should you do it?
- Writing an investment policy statementWhy write an investment policy statement, and what goes in it?
Related terms
Spotted a mistake or something unclear? Report it by email. Here is how corrections work.