The periodic adjustment of a portfolio back to its target asset allocation by selling outperforming assets and buying underperforming ones — systematically buying low and selling high.
Deeper Explanation
Rebalancing is the discipline that embeds contrarian behaviour into a systematic portfolio process. When equities rise significantly, they become a larger portion of the portfolio — rebalancing trims the overweighting (selling high). When bonds or alternative assets fall, they become underweighted — rebalancing adds to them (buying low). Research consistently shows that rebalanced portfolios produce modestly better risk-adjusted returns than unrebalanced ones over long periods, while also reducing overall volatility. Dalio's All-Weather Portfolio rebalances when any asset class deviates more than 5% from its target risk allocation — a risk-based rather than calendar-based rebalancing trigger.
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