Rebalancing is a discipline for maintaining the risk structure you chose. It is not a method for predicting the next market winner, and it is not a review of whether that structure still suits you.
It restores a portfolio towards its intended asset mix after market movements have shifted the weights. If shares rise faster than bonds, for example, the portfolio may gradually hold more equity risk than planned.
It can involve directing new contributions to underweight assets, selling some overweight holdings or making changes inside a managed portfolio.
There are trade-offs. Transactions can create costs, tax consequences and time out of the market. Rebalancing too frequently may create unnecessary activity; never rebalancing can allow concentration to grow. The policy should therefore explain target ranges, review frequency, responsibility and how cash flows are used.
Try this now
Compare the current asset allocation of one portfolio with its target or strategic allocation. Note any material difference and whether a documented range permits it.
Ask your advisor
- Who is responsible for rebalancing and under what rule?
- Can contributions or withdrawals restore the balance before assets are sold?
- What costs or tax consequences would a rebalance create?
Rebalancing returns the portfolio to an agreed plan. It does not prove that the original plan remains suitable; that still needs review.