What is Rebalancing?

Background

Rebalancing means restoring your portfolio to its target asset allocation after market movements have pushed it off balance. It keeps risk at the level you originally chose.

Explanation

If equity outperforms and rises from 60% to 75% of your portfolio, rebalancing involves trimming equity and adding to debt to get back toward 60:40. You can rebalance on a calendar schedule (yearly) or when allocations drift beyond set thresholds.

Example

After a big rally your equity portion has grown much larger than planned. You sell part of your equity funds and move that money to debt funds, effectively locking-in some gains and reducing risk.

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