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Rebalancing Meaning

Rebalancing is the strategic process of adjusting the weightings of assets within an investment portfolio to maintain a target level of risk and return. Over time, as some assets grow faster than others, the portfolio can become "drifted"-meaning it might become more aggressive or more conservative than the investor intended.

Rebalancing involves selling some of the "winners" and buying more of the "underperformers."In the fintech world, this is often handled by Robo-advisors or smart contracts. For example, a DeFi index fund like the DPI (DeFi Pulse Index) uses a set of rules to automatically buy and sell tokens at the end of each month to ensure it accurately tracks the top projects in the space without manual intervention.

This removes human emotion from the process, which is often the biggest obstacle to successful rebalancing.While it can feel counter-intuitive to sell the assets that are doing well, it is a disciplined way to "sell high and buy low." In the highly volatile crypto market, rebalancing is a critical tool for preserving gains.

An investor who doesn't rebalance might find their "diversified" portfolio is suddenly 90% in a single speculative memecoin because it went on a massive run, leaving them exposed to a total wipeout if that one coin crashes.

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