What does rebalancing a portfolio involve?

Rebalancing a portfolio involves buying or selling assets to align the actual asset distribution with predetermined target allocations. Over time, the values of different assets within a portfolio can change significantly due to market fluctuations, leading to an imbalance in the desired asset allocation. For instance, if stocks perform well, they might comprise a larger portion of the portfolio than intended, increasing overall risk.

By rebalancing, an investor maintains their risk tolerance and investment strategy, ensuring that the portfolio remains aligned with their financial goals. This process can also help to realize gains on high-performing assets by selling a portion of them and reinvesting the proceeds in underperforming or lower-risk assets, thereby maintaining the desired level of diversification.

The other options do not accurately capture the essence of rebalancing. Adjusting the time frame for investments does not involve modifying asset allocations. Investing exclusively in bonds would overly limit diversification and may not reflect a balanced strategy. Selling only high-performing assets does not ensure alignment with target allocations, as it does not consider underperforming assets that may require adjustments as well.