Rebalancing: A Form of Market Timing

I can tell you two things about rebalancing: (1) Most investment advisors will recommend rebalancing, and (2) Most investors won't do it on their own. Here's what rebalancing is really about.

“Rebalancing” means periodically adjusting a portfolio to eliminate any changes in weightings created by market fluctuations. The goal is to move the current asset allocation (and thus the risk level) back in line with the originally planned asset allocation. Securities that have become overweighted are reduced; those that have become underweighted are increased.

You can rebalance within asset classes or between asset classes. An example of rebalancing within an asset class is when an S&P 500 equal-weight fund rebalances in order to bring each holding back to an equal weight. This discussion does not concern itself with rebalancing within an asset class, a strategy that makes sense if you are seriously overweighted in a particular stock. My comments are directed toward the more common rebalancing between asset classes.