What is portfolio rebalancing and why is it done?

Over time, as the different kinds of assets in your portfolio deliver different returns, the composition of your portfolio can drift away from your targeted asset allocation mix. This can inadvertently result in an increase in your risk exposure, particularly if the mix becomes concentrated to higher risk (and potentially overpriced) asset classes and underexposed to more conservative investments.

For these reasons, it is important that portfolios be periodically “rebalanced” back to their target asset mix.

A wealth of research studies has shown that rebalanced portfolios generate higher returns and with less volatility than portfolios that were allowed to drift. Read more about this in the “Moving Beyond Set and Forget” section of our Investment Philosophy.

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