What does it mean to "rebalance" an investment portfolio?

Rebalancing an investment portfolio refers to the process of adjusting the weights of different assets within the portfolio to maintain a specific desired asset allocation. Over time, due to varying returns among the investments, the original percentages may drift away from the intended allocation. For example, if a portfolio was initially set to have 60% in stocks and 40% in bonds, a strong performance in stocks might push that allocation to 70% stocks and 30% bonds. Rebalancing brings the allocation back in line with the investor's strategy, which is important for managing risk and achieving long-term investment goals. This process can involve selling some assets and buying others to restore the target allocation, ensuring that the investment strategy remains aligned with the investor's risk tolerance and objectives.