Question 7
Rebalancing is the process of returning your portfolio to a target allocation (for example, 70% stocks / 30% bonds) after market movements push weights off target. Over time, some assets may outperform and grow larger in the portfolio while others shrink; rebalancing forces you to sell a portion of the winners and buy the laggards, which can help maintain your desired risk profile and instill disciplined buying low/selling high. There are trade-offs -- rebalancing can trigger taxes in taxable accounts and may incur trading costs -- so many investors pick a frequency (annual, semiannual) or threshold (e.g., 5% drift) to trigger rebalancing. This question asks what rebalancing primarily achieves.
Why do investors rebalance their portfolios?
Did You Also Know...
By Wise Wallet
Persistent inflation erodes cash purchasing power, which is why savers often seek investments that outpace inflation.