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

Rebalancing an investment portfolio refers to the practice of adjusting the proportions of different assets within that portfolio to maintain a desired asset allocation that aligns with the investor's risk tolerance and investment goals. Over time, due to varying market performance, the values of assets can shift, leading to an allocation that no longer reflects the intended strategy. For instance, if stocks perform significantly better than bonds, the stock portion of a portfolio may grow to a larger percentage than originally intended, increasing the overall risk.

By rebalancing, an investor sells portions of the overperforming assets and buys more of the underperforming ones, ensuring that the overall risk profile remains balanced and aligned with long-term objectives. This disciplined approach helps in mitigating risk and ensuring that the portfolio reflects the investor's ongoing financial strategy.