If your portfolio has been growing for a while, there’s a good chance it no longer matches the mix you originally chose. Rebalancing is the process of bringing your investments back to your intended allocation—so your risk level stays aligned with your goals.
Done well, rebalancing isn’t about predicting markets. It’s about risk control and maintaining a plan you can stick with.
What Rebalancing Means (in plain English)
Most investors pick a target mix—like:
- 70% stocks / 30% bonds
- 60% U.S. stocks / 20% international / 20% bonds
- or a more conservative blend as retirement gets closer
Over time, some parts of your portfolio may grow faster than others. If stocks have a strong run, your 70/30 portfolio might drift to 80/20. That means you’re taking more risk than you intended, even if you didn’t buy anything new.
Rebalancing corrects that drift by:
- selling a portion of what grew “too large,” and/or
- buying more of what fell behind
so you return to your target allocation.
Why Rebalancing Matters
1) It keeps your risk level consistent
Your portfolio’s risk can quietly increase when the higher-volatility assets (like stocks) grow to dominate your mix.
2) It enforces discipline
Rebalancing often means trimming assets after they’ve done well and adding to areas that are down—without trying to guess what happens next.
3) It keeps your plan aligned with your goals
If your timeline or life situation changed, your portfolio may need to reflect that—not just the market’s latest move.
When You Should Rebalance
There are two common approaches. Many investors use a blend of both.
Option A: Rebalance on a schedule
Check your portfolio at regular intervals, such as:
- once a year, or
- twice a year
This is simple and avoids constant tinkering.
Option B: Rebalance when allocations drift beyond a threshold
Instead of using the calendar, you rebalance when your portfolio drifts “far enough” from target. For example:
- If any major allocation changes by 5 percentage points (or another rule you choose)
This can help you rebalance only when it’s actually necessary.
Life Changes That Can Trigger a Rebalance
Even if markets are calm, your “right” allocation can change when your life changes. Common triggers include:
- you’re getting closer to retirement
- you changed jobs or income dropped
- you took on new debt (mortgage, student loans, etc.)
- you built (or lost) an emergency fund
- you’re planning a large purchase within a few years
- your comfort with volatility changed after experiencing a market drop
A portfolio should fit your real life—not just a spreadsheet.
How to Rebalance (Practical Methods)
1) Use new contributions to rebalance first
If you’re still adding money (like through a workplace plan), you can often rebalance without selling anything by directing new deposits toward the areas that are underweight.
2) Rebalance inside tax-advantaged accounts when possible
Rebalancing in accounts like a 401(k) or IRA may avoid immediate tax consequences that can happen when selling in a taxable account.
3) If you must sell in a taxable account, be tax-aware
Selling investments in taxable accounts can create capital gains taxes. You may reduce tax impact by:
- prioritizing rebalancing with contributions first
- considering whether you have losses that can offset gains
- being mindful of holding periods (short-term vs. long-term gains)
(If taxes are a major factor, it may be worth getting tax guidance.)
Common Rebalancing Mistakes to Avoid
- Rebalancing too often: constant adjustments can increase costs and tempt you into market-timing behavior.
- Waiting until it “feels safe”: the whole point is staying aligned with your plan, not your emotions.
- Ignoring fees: if you’re trading frequently or using higher-cost products, costs can chip away at returns.
- Forgetting your goal: rebalancing isn’t about maximizing short-term returns—it’s about keeping risk appropriate for your timeline.
A Simple Rebalancing Checklist
If you want a quick process:
- Write down your target allocation (your “ideal mix”).
- Compare your current allocation to the target.
- Decide your rule: annual check, drift threshold, or both.
- Rebalance using contributions first if possible.
- Keep taxes and costs in mind if selling is required.
- Re-check after you make changes, then leave it alone.