Rebalancing
Rebalancing is the process of realigning portfolio weights back to target allocations by buying and selling assets as market movements cause drift.
Concept map
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Definition
Rebalancing is the process of realigning portfolio weights back to target allocations by buying and selling assets as market movements cause drift.
Use case
Used in portfolio management workflows, analysis, and technical interviews.
Judgment check
Useful only when the assumptions and inputs behind the metric are understood.
Deep dive
How to think about Rebalancing
Without rebalancing, a 60/40 stock/bond portfolio might become 80/20 after a bull market, increasing risk. Rebalancing enforces buy low, sell high discipline. Strategies include calendar (monthly/quarterly), threshold (when allocation drifts >5%), and tactical (opportunistic). Costs include transaction fees and taxes.
Example: Portfolio targets: 50% stocks, 50% bonds. After stocks rally, allocation becomes 60/40. Rebalancing sells $10K of stocks to buy $10K bonds, restoring 50/50. This mechanically sells the outperforming asset and buys the underperformer.