What is the primary purpose of rebalancing a portfolio?

The primary purpose of rebalancing a portfolio is to maintain the desired asset allocation and risk level. Over time, the values of different investments within a portfolio can change due to market fluctuations, which can lead to an unintended drift from the initial asset allocation strategy. For instance, if stocks perform exceptionally well, they may grow to constitute a larger portion of the portfolio than originally intended, increasing the overall risk.

Rebalancing involves selling portions of the assets that have increased in value and buying those that have decreased, thus realigning the portfolio with its target allocation. This process helps ensure that the investor remains aligned with their risk tolerance and investment objectives, preventing unintended overexposure to certain asset classes.

The other choices do not capture this fundamental aspect of rebalancing. Increasing the number of investments does not address the risk or allocation concerns, focusing only on fixed income assets neglects the diversification principle, and replacing underperforming assets might not necessarily relate to maintaining the overall asset allocation strategy. Rebalancing is more about adjusting the mix of assets rather than strictly managing individual performance.