Once you set your asset allocation, your portfolio won’t stay in balance forever. That’s because investments grow at different rates. For example, if your stocks perform really well, they might end up making up a bigger chunk of your portfolio than you planned. That’s where rebalancing comes in.
Rebalancing is the process of adjusting your portfolio back to your original target. Let’s say you wanted 60% in stocks and 40% in bonds, but now stocks have grown and you’re at 70/30. Rebalancing would mean selling some stocks and buying more bonds to get back to your 60/40 goal.
Rebalancing helps you manage risk. If one part of your portfolio gets too big, it could make your entire strategy riskier than you’re comfortable with. It also forces you to buy low and sell high—selling investments that have gone up and buying those that are cheaper.
You don’t have to rebalance all the time. Most people do it once or twice a year. Some investment accounts even offer automatic rebalancing. The important thing is to check in regularly and keep your portfolio aligned with your plan.
