Rebalancing is the act of returning your portfolio to its original target asset allocation. Over time, as certain assets outperform others, your portfolio will naturally drift. If stocks grow 20% and bonds stay flat, your initial 60/40 portfolio might become a 70/30 portfolio, taking on more risk than you intended.
To rebalance, you sell a portion of the high-performing assets (selling high) and use the proceeds to buy more of the underperforming assets (buying low). This systematic process forces you to lock in gains and maintain disciplined risk management.
Most experts recommend reviewing and rebalancing a portfolio on an annual or semi-annual basis, or whenever an asset class drifts more than 5% from its target weight.