When establishing an investment portfolio prudent investors will set themselves an asset allocation. The asset allocation determines how much of an investment portfolio is allocated to each asset class. For example, you may allocate 50% of your portfolio to Australian Shares and 50% to the Fixed Interest asset class.

Over time, as your portfolio value changes, these allocations will move away from the 50% target. Rebalancing is the method of bringing your investment portfolio back in line with its asset allocation.

This may involve the selling of shares and the purchasing of fixed interest assets or vice versa.

Often, it involves the selling of an asset after it has experienced a ‘run’. For example, after a strong period of earnings growth your exposure to Australian Shares may be in excess of 50%. Rebalancing dictates the sale of some shares to bring the asset allocation back in line with the recommended 50% weighting.

This can appear counter intuitive as you are effectively selling an asset that has been performing strongly. In actual fact it is a proven method of selling assets at the top and then buying back in at the bottom.

So the next time your adviser recommends the sale of a particular asset it is not necessarily because that investment has gone bad it could a strategy to lock in profits with the reallocation of capital to another asset class.