What effect does disciplined rebalancing have on a portfolio?

Disciplined rebalancing is a strategy used in portfolio management to maintain a desired asset allocation by periodically buying or selling assets. This approach primarily aims to keep the risk level of the portfolio in line with the investor's objectives.

By rebalancing regularly, an investor can take profits from asset classes that have performed well, which have likely increased their weight in the portfolio, and reinvest those profits into underperforming asset classes that have decreased in weight. This practice helps to manage the portfolio’s risk profile, as it prevents any one asset class from becoming too dominant, which could expose the investor to greater volatility and potential losses in adverse market conditions.

In the context of returns, disciplined rebalancing does not just reduce risk; it can also enhance overall returns over time. This is because rebalancing allows investors to buy low and sell high, which can improve the portfolio's risk-adjusted returns. Therefore, the correct answer is that disciplined rebalancing reduces risk while also having the potential to add returns.