Rebalancing explained

Rebalancing is the act of buying or selling holdings inside a portfolio or basket to bring their weights back to a target allocation after price moves have let them drift — for example, trimming a winner that grew from 20% to 30% of a basket and topping up a laggard that shrank to 12%.

A basket is set up with target weights — say, five holdings at 20% each. As prices move, the holding that gains the most becomes a larger share of the basket and the weakest becomes a smaller share, even though no one bought or sold anything. Left alone, a basket that started evenly weighted slowly turns into a concentrated bet on whichever holding ran hardest.

• Sells a slice of holdings that grew above target weight
• Buys more of holdings that fell below target weight
• Resets the basket back to its original target allocation

This is mechanically the opposite of chasing performance — it systematically trims winners and adds to laggards, which is what keeps a basket's risk profile matching the theme or factor it was built around instead of drifting into whatever holding has recently run up the most.