What is Rebalancing?

The act of realigning the weightage of a portfolio of assets, which involves purchasing or selling assets on a regular basis to maintain a specific level of asset distribution and risk, is referred to as rebalancing. It can assist investors in mitigating downside risks all while gaining several benefits.

From a traditional finance perspective, rebalancing may be done in a variety of methods, including manually, where the investor analyzes using spreadsheets and buys/sells through exchanges/brokers, or investing in funds where portfolio managers manage it.

Furthermore, within DeFi, rebalancing can have numerous benefits since the operation can be automated using smart contracts, and it does not need users to continually follow their portfolios and cross-check the value of their assets against the stock markets. This allows customers to divide their profits among various assets while maintaining a net positive gain in the portfolio.

Besides, the majority of rebalancing methods depend on time periods, so they act yearly monthly, or even quarterly.

Additionally, they can be reactive since they rely on permissible percentage combinations of assets, which is more expensive. If the initial goal asset allocation was 50/50 between assets A and B and assets A functioned well, the portfolio weighting may have been boosted to 70%.

So, this shows that an investor has an option to sell a section of A in order to purchase more B in order to achieve the initial goal of allocation of 50/50. 

Whereas the asset divide does not have to be equal, rebalancing is most successful when the portfolio has a fair balance of volatile and nonvolatile holdings, as it protects investors from unwanted dangers as well as overexposure.

Moreover, when there is financial instability the operation of rebalancing is very important to assist people in managing the danger of loss as well as the devaluation of their virtual items.