Suppose you have a simplified portfolio of three asset classes: stocks, bonds, and REIT shares. As the markets move, the initial portfolio investment allocations shift. For example, stocks have a strong year and the equity portion grows to 65% of the portfolio.

To maintain your intended portfolio investment profile, you'll need to rebalance your holdings periodically, say, by selling off some of the equities to buy back the needed percentage of bonds and REIT shares.

This way, you can bring your portfolio back in line with the original 60% stock / 35% bond / 5% REIT mix.