What is a rebalancing strategy in investment management?

A rebalancing strategy in investment management involves the process of realigning the weightings of a portfolio to maintain a desired asset allocation. Over time, due to the differing rates of return on various investments, a portfolio can drift from its original asset allocation. For example, if a portfolio was initially split 60% stocks and 40% bonds and the stocks perform particularly well, the new allocation may become 70% stocks and 30% bonds. Rebalancing involves selling some of the higher-performing assets and buying more of the underperforming assets to bring the portfolio back to its intended allocation. This practice helps manage risk and ensure that the investment strategy remains aligned with the investor's goals and risk tolerance.

Other choices, while they address various aspects of investing or management, do not specifically pertain to the fundamental concept of rebalancing. Investing only in low-risk assets focuses on risk management without addressing allocation adjustments. Upgrading investment software pertains to operational improvements and does not involve asset allocation strategies. Diversifying into new markets is related to expanding investment opportunities but does not specifically involve the adjustment of existing portfolio allocations.