What is a portfolio rebalancing strategy?

A portfolio rebalancing strategy refers to the practice of realigning the proportions of assets in a portfolio. This is essential for maintaining an investor's desired level of risk exposure and ensuring that the asset allocation remains consistent with their financial goals and investment strategy over time.

For example, if an investor initially allocates 60% of their portfolio to equities and 40% to bonds, market movements can cause these proportions to shift, resulting in a higher risk profile than intended if equities perform well or a lower growth potential if bonds perform better. By rebalancing, the investor will sell a portion of the asset that has increased in value and buy more of the asset that has decreased in value, thus reverting back to the original asset allocation.

This practice is not about selling all investments in the portfolio, increasing returns, or specifically reducing volatility, although rebalancing can have an effect on these aspects. Instead, it focuses on maintaining a targeted investment mix according to the investor's goals and risk tolerance.