Glossary · UK
What is Portfolio Rebalancing?
Periodically buying or selling holdings within an investment portfolio to bring the mix of assets back to its original target allocation after market movements have shifted it.
Full Definition
Portfolio rebalancing is the process of realigning the mix of investments in a portfolio back to its original, or intended, target allocation after market movements cause it to drift. For example, a portfolio initially split 60% shares and 40% bonds will end up with a different split after a period of strong share price growth, since the shares portion grows faster than the bonds portion -- rebalancing means selling some of the now-overweight shares and buying more bonds (or directing new contributions toward bonds) to bring the split back to 60/40. Rebalancing is typically carried out on a set schedule, such as annually, or triggered whenever an allocation drifts by more than a set threshold (for example 5 percentage points) from its target, and is a standard, automated feature of many robo-advisers, target-date pension funds and multi-asset funds. Its purpose is not to boost returns directly but to manage risk: without rebalancing, a portfolio's risk profile can gradually creep upward as higher-growth, more volatile assets come to dominate it, which can leave an investor exposed to more risk than they originally intended or than suits their circumstances as they approach a goal such as retirement.