What is rebalancing?

In essence, it’s trying to bring your investments back to the original plan.

The process of rebalancing involves moving money from funds that are over-weighted to ones that are under-weighted to regain the original weightings of your assets.

Say you have 4 bunnies and 2 cages. You want your bunnies to be split 50/50 between the cages so you put two in one cage and two in another. Great. But now let’s say one set of bunnies has 20 little bunnies and the other set only has 10. You would move 5 little bunnies from the cage that has 20 and put them into the cage that has 10. Now there is 15 in each and you are back to 50/50.

Of course, doing this in finance is a lot more complicated but the basic idea is the same.