Portfolio rebalancing can be described as portfolio maintenance for your investment portfolio. It performs the necessary transactions in your portfolio to bring it back into alignment with your selected asset allocation. In other words, it is adjusting portfolio asset weights in order to restore target allocations or risk levels over time.
This process helps you keep your investment portfolio from becoming out of balance in relation to the asset allocation plan originally selected to help you meet your financial goals. Rebalancing a portfolio is typically performed either on a regular schedule (quarterly, yearly, etc.) or when a portfolio’s allocation becomes unbalanced by breeching established parameters.
For example, if the riskiness of European assets changes from the day you signed up or determined your risk tolerance, we’ll increase or decrease your exposure to Europe by buying or selling European and other assets in your portfolio.
Portfolio rebalancing involves transactions fees as different securities are bought and sold. Because of this, it can be counterproductive if performed too often. A typical portfolio rebalancing cycle might be every quarter, every two quarters, or once a year. It can also be difficult and time-consuming to make the various calculations necessary to perform portfolio rebalancing if you are doing it yourself without professional assistance.