InvestmentFinancial Glossary
Rebalancing
Definition
The process of realigning your portfolio's asset allocation back to the target proportions by selling overweight assets and buying underweight ones. If your target is 70% equity and 30% debt, and a bull market pushes equity to 85%, rebalancing involves selling some equity and buying debt to restore the 70-30 split.
Why It Matters
Rebalancing enforces the discipline of buying low and selling high. It prevents your portfolio from becoming dangerously concentrated in a single asset class after a strong run. Annual rebalancing (or threshold-based rebalancing when any asset drifts by more than 10% from target) has been shown to improve risk-adjusted returns over long periods.