Portfolio rebalancing and optimization are two important concepts when it comes to managing your investment portfolio. While they are related, they serve different purposes and have different implications for your investment strategy.
Rebalancing
Rebalancing refers to the process of adjusting the allocation of your assets in your portfolio to align with your original investment strategy or target asset allocation. This can be done on a regular basis, such as annually, or when certain thresholds are met, such as when a particular asset class deviates from its target allocation by a certain percentage. The goal of rebalancing is to maintain a consistent level of risk in your portfolio and to prevent any one asset class from becoming too large a portion of your portfolio.
Optimization
On the other hand, portfolio optimization is the process of selecting the optimal mix of assets in your portfolio to maximize your expected return given a certain level of risk. This is done through a combination of mathematical modeling and statistical analysis, and takes into account factors such as expected returns, risk, correlation, and constraints such as minimum and maximum allocations to each asset class. The goal of portfolio optimization is to find the best possible trade-off between risk and return.
Summary
It is important to note that while both rebalancing and portfolio optimization are important for managing your investment portfolio, they serve different purposes. Rebalancing helps to maintain the risk level of your portfolio over time, while portfolio optimization helps you to find the best possible risk-return trade-off. As such, you should consider both when developing your investment strategy.