Rebalancing is buying and selling to bring a portfolio back to its target mix of stocks, bonds, and cash after market moves have pushed it off course.
Say you choose 60% stocks and 40% bonds. After a strong year for stocks the mix might drift to 70/30, which carries more risk than you chose. Rebalancing sells some of what rose and buys what lagged.
Advisors rebalance either on a schedule, such as once a year, or when a holding drifts past a set band, such as 5 percentage points from its target. In taxable accounts selling can create capital gains, so rebalancing is often done with new contributions, withdrawals, dividends, or trades inside retirement accounts, where selling isn't taxed.
How to check
Your investment policy statement or advisory agreement should state the target mix and the rebalancing rule. Compare it with the actual mix on your statements.
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