Rebalancing a portfolio is the process aiming to sell or buy assets (e.g., securities) that have impacted the value of the portfolio in order to restore their original weights and significance therein. By so doing, a portfolio manager can ensure that it will regain its asset allocation as per the originally set weights and percentages.

This may also involve buying and selling shares in mutual funds, exchange-traded funds (ETFs) or other investments to bring a portfolio back to its originally planned asset allocation. As the components of the portfolio change in value, the portfolio can divert from its asset allocation. If its original asset allocation was a mix of equity-debt of 80-20, with an appreciation of the equity investments by 5%, that allocation would change to 85% stocks and 15% bonds based on market returns, given that the bonds lost value and the stocks advanced. For example, a portfolio manager, after may need to sell 5% of the portfolio’s value in stock holdings and deploy the proceeds to purchase debt securities. This would bring the portfolio back in line with the planned asset allocation of 80% stocks and 20% bonds.