Portfolio rebalancing is the process of buying and selling assets to align your portfolio with the target asset-allocation percentages you determined in your investment plan. Over time, a portfolio can become unbalanced, or different from your target asset allocations, as various events occur. These events include changes in asset and asset class performance, changes in your personal objectives or risk-tolerance level, and the introduction of new capital or new asset classes that you think are attractive.

It is important to rebalance your portfolio to ensure you are still moving toward your personal goals at an acceptable level of risk. The challenge of rebalancing is that each time you sell a security, you incur transaction costs; for taxable accounts, you also create taxable events.