Rebalancing
What does it mean to return a portfolio to its target weights after prices move, and why do traders bother?
In plain words
Rebalancing is selling part of what has grown and buying part of what has shrunk so that each holding returns to its chosen share of the total. Without it, the best-performing asset slowly takes over the portfolio.
Why it matters
Every portfolio drifts with prices. A position that grows beyond its target starts carrying more risk than intended, so a rebalance restores the original risk mix rather than letting one market silently dominate the whole account.
In a real week: BTC, week of 30 August 2021
In the week of 30 August 2021, BTC rose 6.13%, while ETH outperformed it by 16.42 percentage points, and the ETH-to-BTC ratio changed 15.47%. In a portfolio split evenly between the two, BTC's share therefore drifted below its target weight. Rebalancing meant trimming ETH back towards its target and adding BTC at that week's prices.
A common mistake
Thinking rebalancing means buying whatever fell. It is a return to a chosen weight, which can require selling an asset that is still rising.