portfolio rebalancing
The process of buying and selling assets to restore a portfolio back to its target allocation after market movements have caused drift.
Example
“After tech stocks surged, his 60/40 portfolio drifted to 75/25 and required rebalancing back to target.”
Memory Tip
Portfolio REBALANCING = trimming winners, adding to laggards to restore your target mix.
Why It Matters
Portfolio rebalancing helps you maintain your intended risk level and prevents your portfolio from becoming too concentrated in one asset class. Without rebalancing, your portfolio drift can cause you to take on more risk than you are comfortable with or miss out on gains from underweighted areas.
Common Misconception
Many people believe that rebalancing means constantly buying and selling to chase returns or time the market. In reality, rebalancing is a disciplined strategy to maintain your original asset allocation regardless of market performance.
In Practice
Suppose you start with a 60 percent stocks and 40 percent bonds portfolio worth 100000 dollars. After a year of strong stock market returns, your portfolio grows to 115000 dollars with stocks now representing 70 percent and bonds 30 percent. Rebalancing would involve selling approximately 8600 dollars of stocks and buying 8600 dollars of bonds to restore your portfolio to the original 60/40 target allocation.
Etymology
PORTFOLIO (collection of investments) RE- (again) + BALANCE (restore equilibrium).
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See Also
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