Rebalancing

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Description of Rebalancing. Explanation.

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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.