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Portfolio Rebalancing
Definition
Realigning portfolio asset allocation back to target percentages.
Explanation
If your target is 60% stocks / 40% bonds and stocks perform well, allocation drifts to 70/30. Rebalancing sells some stocks and buys bonds to restore the original split. This forces you to sell high and buy low.
Most advisors recommend rebalancing annually or when allocations drift more than 5% from targets.
Example
Target: $60,000 stocks + $40,000 bonds. After gains: $78,000 stocks + $38,000 bonds (67/33). Rebalance by selling $8,000 stocks and buying $8,000 bonds.