Definition
As asset prices change, portfolio weights drift from targets. A 60/40 portfolio may become 70/30 after a stock rally. Rebalancing sells outperformers and buys underperformers to restore targets—a contrarian strategy that enforces discipline. Calendar-based (quarterly/annually) and threshold-based (rebalance when weights drift 5%+) are common approaches.
lightbulb Example
Target is 60% stocks/40% bonds. After a rally, actual is 68%/32%. Rebalancing sells 8% of stocks (at high prices) and buys bonds (at relatively low prices), restoring 60/40 and reducing risk.
verified_user Key Points
- Maintains risk profile consistent with investor goals
- Contrarian discipline: sell high, buy low
- Calendar or threshold-based triggers
- Tax-loss harvesting can be combined with rebalancing