Financial Term Explorer
Portfolio Rebalancing
Periodically adjusting your portfolio to maintain your target allocation. Selling winners and buying laggards enforces 'sell high, buy low' discipline.
š Definition
**Portfolio Rebalancing** is the process of realigning portfolio weights to target allocations by buying underweight positions and selling overweight ones. This can be done on a schedule (quarterly, annually) or when allocations drift beyond thresholds.
In Simple Terms
Start with 60% stocks, 40% bonds. After a bull market, you might be 75% stocks, 25% bonds. Rebalancing means selling some stocks and buying bonds to get back to 60/40. It forces you to book profits and buy beaten-down assets.
Example
Your tech dividend stocks doubled while REITs fell 20%. You're now 40% tech, 10% REITs instead of your target 25% each. Rebalancing means trimming tech winners and adding to discounted REITs.
š” Practical Tips
- 1Rebalance annually or when allocations drift 5%+ from targets.
- 2Use new contributions to rebalance instead of selling (tax-efficient).
- 3Don't over-rebalanceātransaction costs and taxes add up.
ā ļø Common Mistakes
Rebalancing too often (creates taxes) or never (drifts into excessive risk).
ā Frequently Asked Questions
How often should I rebalance?ā¼
Once or twice yearly is typical. Some prefer threshold-based: rebalance when any position drifts 5%+ from target.
Does rebalancing improve returns?ā¼
Not necessarily higher returns, but it manages risk and enforces disciplineāselling high and buying low.