Rebalancing entails adjusting your investment holding to desired percentages for your stocks and bonds. Let's take an example where your target allocation is 20% bonds, 20% cash, and 60% stocks. You may now have a 70 percent stock, 10 percent bond, and 20 percent cash allocation if the stock market has done really well over the last year. You can sell some stocks and reinvest the proceeds in bonds to rebalance your portfolio, or you can add more bonds to the portfolio to restore its original balance.
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