Rebalancing

Buying or selling to bring a portfolio back to its intended mix after markets move it out of shape.

Example

If stocks grow to 80% of a portfolio meant to be 60/40, selling some stock and buying bonds to restore the 60/40 split.

Important

Rebalancing is a discipline for managing risk, not a way to boost returns - done well it usually costs a little return in exchange for a steadier ride.

Related terms

• Time horizon — How long before you plan to spend the money you are investing.
• Volatility — How much and how often an asset's price moves, up or down, over a given period.

Lessons that explain it

• A sized bet, renewed on purpose — If it belongs anywhere, it belongs as a position small enough that a total loss is survivable - and the diversification argument most often used to justify it has a habit of failing in exactly the weeks it is needed. (9 min)
• Rebalancing: returning to the plan — Left alone, a portfolio drifts towards whatever has done best - which is the same as drifting towards a bet on the recent past continuing. Rebalancing is the small, unpleasant act that undoes it. (9 min)
• One scheduled review beats constant tinkering — A yearly review checks allocation, concentration, costs and whether holdings still match their purpose. Doing it on a schedule, in writing, prevents both neglect and reacting to every market move. (9 min)
• Time horizon — The same investment is a completely different bet depending on when you'll need the money. This is the variable that decides almost everything else. (10 min)

All 578 terms in the Investing glossary