Stock Market Glossary
Rebalancing
Restoration of original portfolio weights.
In brief: Restoration of original portfolio weights.
Meaning in practice
If stocks rise sharply, their share grows above the target weight – and with it the risk. Rebalancing involves selling what has become too large and buying what is below target. Used in a disciplined manner, rebalancing is one of the few scientifically proven return boosters.
Context for investors and traders
For investors, the term becomes practical in the context of objectives, time horizon, risk capacity and costs. A suitable solution can differ between two people even when they consider the same product or metric.
How to use this in practice
The term becomes practical when expressed in numbers: what is the position weight, which costs apply, what loss is possible and what role does it play in the portfolio? These questions prevent an otherwise useful product from becoming too large or being used at the wrong time.
What to keep in mind
Include taxes, spreads, product structure and personal liquidity reserves in comparisons. Historical returns and a fund’s or index’s characteristics describe the past, not a promised future result.
