Definition Rebalancing. Description.
Rebalancing is the investing process of realigning
the weightings of a portfolio of assets to a target asset portfolio composition.
Under-weighted securities can be bought and added with cash; alternatively,
over-weighted securities can be sold and decreased to purchase under-weighted
securities.
Institutional
investors often have a long-term investment strategy which is based on
holding a certain mix of stocks,
bonds, options, futures,
other investments and cash. Suppose that due to a price increase of the bonds,
its size in the total portfolio increase. This would then require to rebalance
the portfolio in order to restore the equilibrium.
The time interval for a rebalance could be anything between
a year for private investors to quarterly or even daily for large institutional
investors. Alternatively it can occur when the portfolio is more than a certain
percentage off target. A simple way to decrease the need for rebalancing is
by using index funds or
mutual funds.
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Compare with: Capital Asset Pricing
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