Portfolio rebalancing is the process of adjusting the allocation of assets in an investment portfolio to maintain a desired level of risk and return. Over time, market movements can cause certain assets, like stocks or bonds, to grow or shrink disproportionately. For example, if stocks perform well, their value in the portfolio may increase beyond the intended percentage, making the portfolio riskier than planned. Rebalancing helps bring the portfolio back in line with the investor’s original strategy.

Investors usually rebalance by selling some of the assets that have increased in value and buying more of those that have declined. This restores the target asset mix, such as 60% equities and 40% bonds. Rebalancing can be done periodically, say quarterly or annually, or when asset weights deviate beyond a certain threshold.

The main purpose of rebalancing is to control risk rather than maximise returns. It helps investors stay disciplined and avoid emotional decisions driven by short-term market trends. Without rebalancing, a portfolio might become overexposed to volatile assets, increasing potential losses during market downturns.

Although rebalancing may involve transaction costs or taxes, it ensures that the portfolio remains aligned with the investor’s goals, time horizon, and risk tolerance, maintaining a stable and consistent investment strategy over the long term.