Rebalancing is the systematic process of reallocating assets within a portfolio. The objective is to keep each asset's share of the portfolio in line with predetermined percentages. For example, if a portfolio utilizes five different mutual funds and the goal is for each fund to represent 20% of the total portfolio value, the portfolio will need to be rebalanced periodically to maintain the equal weighting. This is because each fund will not likely have the same return each year. To rebalance, an investor sells shares of the best-performing funds and then uses the proceeds to purchase shares of the worst-performing funds.
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