What does "rebalancing" a portfolio refer to?

Rebalancing a portfolio refers specifically to adjusting the proportions of various assets back to their desired allocation. Over time, as market conditions change, the values of different assets within a portfolio can fluctuate, leading to an imbalance in the intended asset allocation. For example, if a portfolio was originally designed to have 60% in stocks and 40% in bonds, significant growth in the stock market could result in the stock percentage increasing to 70%.

Rebalancing involves selling some assets that have exceeded their target allocation and purchasing others that are underrepresented. This process helps maintain the investor's risk profile and investment strategy by ensuring that the portfolio continues to align with the investor's goals and tolerance for risk. Essentially, it is a way to manage risk and can help in achieving the long-term investment objectives more effectively.