Selling part of what has grown and buying what has lagged to bring a portfolio back to its target mix.
Example
Say your target is 60% stocks and 40% bonds on a $100,000 portfolio. After a strong year for stocks, they are worth $72,000 and the bonds $38,000, a mix of about 65/35 on $110,000. Rebalancing means selling $6,000 of stocks and buying $6,000 of bonds, which brings you back to $66,000 and $44,000, exactly 60/40.
Hypothetical numbers, for illustration only.
Three stacked bars with green stocks and hatched gray bonds: start, $10,000 split $6,000 (60%) and $4,000 (40%); after a year, $12,000 split $8,400 (70%) and $3,600 (30%); rebalanced, $12,000 split $7,200 (60%) and $4,800 (40%). Between the last two, notes read sell stocks $1,200 and buy bonds $1,200, and a small note says example target, not a recommendation.
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