Rebalancing.
In plain English
If you've decided your portfolio should be 80% stocks and 20% bonds, market movements will push it off-target over time. After a big stock rally, you might be 88/12. After a stock decline, 70/30. Rebalancing is the act of selling some of what's grown disproportionately and buying more of what's underweight, returning to your target allocation. Most people rebalance once a year or when allocations drift more than 5 percentage points off target.
01Why it matters
Rebalancing forces a small version of 'buy low, sell high' on autopilot. It also keeps your overall risk level consistent, if you don't rebalance, a long bull market silently turns a 'moderate' allocation into an 'aggressive' one, and you might own much more risk than you intended right before a downturn.
02The math, step by step
You hold $100,000: $80,000 stocks, $20,000 bonds (80/20). A year later, stocks rallied; the balance is now $100,000 stocks and $20,000 bonds, 83/17. You sell $4,000 of stocks and buy $4,000 of bonds. You're back to 80/20. Many target-date funds and robo-advisors do this automatically; in a self-managed portfolio, you do it manually once a year.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Rebalancing isn't a prediction. It's a discipline that mechanically moves money from what's done well to what's lagged, regardless of what you think comes next. The point isn't to outsmart anyone, it's to keep your risk level consistent with what you originally chose.
Plain-English answers from our glossary. Receipts included. Never advice.
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