What does it mean to 'rebalance' an investment portfolio?

Rebalancing an investment portfolio refers to the process of adjusting the proportions of different assets within a portfolio to ensure that the desired asset allocation is maintained over time. Essentially, as the values of individual investments change due to market fluctuations, the original allocation can become skewed. For example, if stocks increase significantly in value while bonds remain stable, the portfolio may become overly weighted in stocks.

Rebalancing helps to return the portfolio to its targeted allocation, which can help manage risk and align with the investor's financial goals. This process may involve selling a portion of the assets that have increased in value and purchasing assets that have not performed as well, thus keeping the investment strategy consistent with the investor's risk tolerance and long-term objectives.

The other options pertain to different financial activities that do not define rebalancing. Increasing the total investment amount involves adding more capital to the portfolio, consolidating accounts pertains to simplifying multiple investments into a single account, and buying and selling assets daily for profit describes a trading strategy rather than a structured investment approach like rebalancing.