Rebalancing is the process of realigning your investment portfolio's asset allocation back to your target percentages by buying or selling investments. Over time, different investments grow at different rates, causing your portfolio to drift from your intended allocation. For example, if your target allocation is 70% stocks and 30% bonds, a strong stock market might shift your actual allocation to 80% stocks and 20% bonds, increasing your risk exposure beyond your comfort level. Rebalancing involves selling some stocks and buying bonds to return to your 70/30 target.

The practice serves several important functions: it maintains your desired risk level as market movements can make your portfolio more or less risky than intended, it enforces disciplined investing by forcing you to "sell high and buy low" (selling assets that have performed well and buying those that have underperformed), and it prevents over-concentration in any single asset class. Rebalancing can be done on a calendar schedule (annually, semi-annually, or quarterly) or when allocations drift beyond a certain threshold (commonly 5% from targets). While rebalancing may seem counterintuitive—selling your winners to buy your losers—it's a proven strategy for managing risk and potentially enhancing long-term returns. Many target-date funds and robo-advisors handle rebalancing automatically.