Definition
Rebalancing is simply buying and selling things in a portfolio so a particular asset class is a previously agreed upon percentage of the portfolio.
For Example
A client (with a $100,000 portfolio) told their advisor they want their portfolio to be 50% cash and 50% stocks. So their portfolio is $50,000 of cash and $50,000 of stocks. The value of the stocks rises so the portfolio is now 40% cash and 60% stocks. So their portfolio is $50,000 of cash and $75,000 of stocks. The advisor would sell $12,500 of stock to bring the portfolio back to a 50:50 split. The portfolio would therefore be $62,500 of cash and $62,500 of stocks. There are many different types of asset classes. Some examples are stocks, real estate, precious metals, artwork, bonds, etc.
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Questions for the comments
Did my explanation make sense? Do you agree or disagree with what I said?
