What does rebalancing mean in investment?

Hi anon,

Rebalancing is really to restore the allocation of your portfolio to what was originally envisioned when you started.

Let's say you wanted a 50/50 equity/bond portfolio. Over time, as markets rallied, your portfolio become 60/40. Rebalancing would simply involve selling off the excess 10% from equity and buying bonds with those proceeds, restoring your allocation to 50/50. This also has an effect of 'taking profit' if you will. While it may be difficult to do as people are usually relectuant to sell winners and buy 'losers', it's still important to do this regularly.

Hi there, the exact technical term may mean adjusting based on a certain "forumula" allocation such as 20% bonds and 80% equities.

However, whats more important is what is important for your portfolio. For example, there may be certain positions that you bought previously but because of change in fundamentals of the company or goals you may have, you may want to readjust your portfolio.

For example, I like dividend investing for the passive cashflow and income, but I know that the returns are extremely little with small portfolios. The faster way for me to reach my financial destination would be to first go for more capital gains and when I am older, rebalance my portfolio to have higher % allocation to defensive companies that pay dividends.