Rebalancing
Periodically restoring the portfolio to its target weights.
What is Rebalancing?
Selling what has grown beyond target and buying what has lagged. It enforces sell-high, buy-low discipline and, more importantly, keeps risk from drifting upward during bull markets. Can be calendar-based or threshold-based.
Rebalancing: a worked example
A 60/40 that drifts to 72/28 after a rally gets sold back to 60/40.
More terms in Portfolio Management
Asset Allocation
How a portfolio is split across stocks, bonds, cash, and alternatives.
Dollar-Cost Averaging
Investing a fixed amount on a fixed schedule regardless of price.
Modern Portfolio Theory (MPT)
Optimize the portfolio as a whole, not security by security.
Efficient Frontier
The set of portfolios with the best return for each level of risk.
Capital Asset Pricing Model (CAPM)
Expected return = risk-free rate + beta x market risk premium.
Efficient Market Hypothesis
Prices already reflect available information.
Compound Annual Growth Rate (CAGR)
The smoothed annual rate that gets you from start to end value.
Total Return
Price change plus income, as a single return figure.