What is the purpose of portfolio rebalancing?

The purpose of portfolio rebalancing is primarily to adjust asset weightings within an investment portfolio to maintain a desired risk level and asset allocation strategy. Over time, as different assets within the portfolio perform differently, the original weightings can shift due to gains or losses. Rebalancing involves buying or selling assets to realign the portfolio back to its target allocation.

For instance, if stocks perform well and their proportion of the portfolio increases significantly beyond the target percentage, this could expose the investor to higher risk than intended. Rebalancing helps manage this risk by selling some of the stocks and reinvesting in other asset classes that may be underrepresented, thus preserving the risk level aligned with the investor's goals.

The other options do not align with the primary aim of rebalancing. Increasing trading frequency does not inherently lead to better portfolio alignment; rather, it can incur higher transaction costs. Withdrawing funds for personal use is unrelated to the strategy of maintaining risk and achieving investment goals. Investing in alternative assets may be a strategy within rebalancing but does not encapsulate the broader purpose of adjusting asset weightings that reflects the foundational practice of portfolio rebalancing.