Rebalancing

Over time, a portfolio will drift away from its original asset class percentages and should be put back in line with the targets. A 50/50 stock-to-bond mix could easily become a 60/40 stock to bond mix after a prosperous stock market rally. The act of adjusting the portfolio back to its original allocation is called rebalancing.

Rebalancing can be accomplished in three ways:
Adding new cash to the under-weighted portion of the portfolio.
Selling a portion of the over-weighted piece and adding this to the under-weighted class.
Taking withdrawals from the over-weighted asset class.

Rebalancing is a smart, effective, and automatic way to buy low and sell high without the risk of emotions affecting investment decisions. Rebalancing can enhance portfolio performance and return a portfolio to your original level of risk tolerance.