What does it mean to rebalance your portfolio?
“Rebalancing” is adjusting your holdings to match the amount you want in certain investments. Say you want your portfolio to hold 50% stocks and 50% bonds.
- In this case, you’d buy an even value of each — say, $5,000 in stocks and $5,000 in bonds. Your portfolio is worth $10,000.
After a few months, the prices of your stocks go up. At this point, your portfolio’s value might be 60% in stocks and 40% in bonds.
- If you have $7,500 in stocks and $5,000 in bonds, your portfolio is now worth $12,500. If you decide to rebalance your portfolio, match your 50/50 mix of stocks and bonds.
- You might sell some stocks and buy bonds — enough so each type once again makes up 50% of your holdings. In the end, you have $6,250 in stocks and $6,250 in bonds.