You chose a portfolio distribution, 75% NASDAQ 25% S&P.

After 1 year, you look at your portfolio, and because of market movements, your portfolio is now 81% NASDAQ and 19% S&P.

So you sell some NASDAQ and buy some S&P to rebalance to 75% / 25%.

Rebalancing can be any mix of securities or assets (or both). You decide how you want your wealth distributed, and you rebalance to stay within those levels.

Suppose you have an asset allocation strategy that is 25% US stocks, 25% international stocks, 25% real estate (REITs), 25% commodities (I'm not suggesting you do this, but this was the allocation in Roger Gibson's famous multi-asset allocation strategy paper - google it). To implement this you would want to:

1. Choose 4 different funds to represent each of those classes (e.g. an S&P 500 index fund, an MSCI EAFE fund, etc.). You want to be sure to reinvest dividends.

2. On a specific time period (i.e. once a quarter) you rebalance your portfolio - if anything has gone above 25%, you sell it so that you can buy anything that has fallen below 25%.

Many investment platforms let you essentially do this automatically these days.

Not OP. They probably invest in more than one fund, and want to keep the ratio balanced. Eg: 60% MSCI World, 20% Emerging Markets, 10% Tbonds and 10% Gold.

Every few months they would check the ratio and “rebalance”