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Question 7

Rebalancing is the process of returning your portfolio to a target allocation (for example, 70% stocks / 30% bonds) after market movements push weights off target. Over time, some assets may outperform and grow larger in the portfolio while others shrink; rebalancing forces you to sell a portion of the winners and buy the laggards, which can help maintain your desired risk profile and instill disciplined buying low/selling high. There are trade-offs -- rebalancing can trigger taxes in taxable accounts and may incur trading costs -- so many investors pick a frequency (annual, semiannual) or threshold (e.g., 5% drift) to trigger rebalancing. This question asks what rebalancing primarily achieves.

Why do investors rebalance their portfolios?

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