Portfolio rebalancing - Financial definition
Concise definition of the term portfolio rebalancing
Portfolio rebalancing is the process of adjusting the weights of assets in a portfolio to maintain a desired level of risk and return. This typically involves buying and selling assets to realign the portfolio with the investor's target allocation.
Comprehensive definition of the term portfolio rebalancing
Portfolio rebalancing is a key practice in portfolio management that ensures an investment portfolio stays aligned with the investor's financial goals, risk tolerance, and time horizon. Over time, asset values fluctuate due to market movements, which can cause the portfolio to drift away from its original allocation. For instance, if equities outperform bonds, a portfolio may become overly concentrated in stocks, increasing risk.
Rebalancing can be done periodically (e.g., quarterly or annually) or based on a threshold approach, where adjustments are made when asset allocations deviate by a certain percentage from the target. This disciplined approach helps manage risk, lock in gains, and potentially enhance long-term returns.