When an investor’s actual allocation to a specific asset deviates from the target allocation because of market conditions, portfolio rebalancing enables him or her to bring that allocation back to the desired target. For real estate investors, listed REITs are really the only way to easily and efficiently rebalance their real estate allocation when market conditions change.
The process of rebalancing makes a portfolio more efficient. When an asset class has a run up in prices and takes up a great allocation of the overall portfolio, the investor “sells high” in order to get back down to the target allocation. When an asset declines in value and constitutes a lower than desired allocation of the total portfolio, an investor would be “buying low” in order to ramp up back to the target allocation. In fact, academic studies have shown that frequent portfolio rebalancing can contribute a meaningful share of total portfolio returns.