Financial Glossary
Rebalancing
Maintaining discipline: keeping your portfolio aligned with target risk and enforcing buy-low, sell-high behavior.
What is Rebalancing?
Rebalancing is the process of adjusting your portfolio back to its target allocations. If your target is 60% stocks and 40% bonds, and rising stock prices push you to 70% stocks and 30% bonds, you rebalance by selling some stocks and buying bonds to get back to 60/40. Over time, different assets grow at different rates, pushing your allocation away from target. Rebalancing brings it back.
Rebalancing typically happens on a schedule (quarterly, annually) or when allocations drift beyond a threshold (e.g., rebalance if any asset exceeds 5% of target). Systematic rebalancing forces you to sell winning positions (high), buy losing positions (low), which is the opposite of emotional trading and enforces disciplined investing.
Why Rebalancing Matters
Rebalancing serves two purposes: maintaining risk and enforcing discipline. A target allocation defines your risk tolerance—60/40 is less volatile than 80/20. If you don't rebalance and stocks surge to 90% of your portfolio, you've accidentally taken on more risk than you intended. Rebalancing brings risk back to acceptable levels.
Rebalancing also enforces the discipline to sell winners (which are expensive, overvalued) and buy losers (which are cheap, undervalued)—the essence of successful investing. Without rebalancing, you'd naturally buy high (when winning assets are exciting) and sell low (when losing assets are scary). Rebalancing flips this into buying low and selling high.
Disclaimer: Rebalancing incurs transaction costs and taxes (in taxable accounts) that can reduce returns. Rebalancing doesn't protect against losses if all assets decline together. The best allocation and rebalancing frequency depend on your goals, risk tolerance, and time horizon. Consult a qualified financial advisor before establishing an allocation and rebalancing plan. Investments involve substantial risk.