Investing isn’t just about picking the right stocks or funds — it’s also about staying on track over time.
That’s where portfolio rebalancing comes in.
Rebalancing ensures that your asset allocation stays aligned with your goals and risk tolerance — no matter what the market does.
In this article, you’ll learn what rebalancing is, why it’s important, when to do it, and how to make it part of your investment routine.
What Is Portfolio Rebalancing?
Rebalancing is the process of adjusting your portfolio back to its original target allocation.
Let’s say your target was:
- 70% Stocks
- 30% Bonds
But after a strong stock market run, your portfolio now looks like:
- 80% Stocks
- 20% Bonds
That’s too risky compared to your original plan. So, you sell some stocks and buy bonds to restore balance.
Why Rebalancing Matters
Markets are constantly shifting. If you don’t rebalance, your portfolio may:
- Become riskier than intended
- Drift away from your original goals
- Underperform in down markets
✅ Rebalancing helps maintain discipline and risk control.
How Often Should You Rebalance?
There’s no one-size-fits-all answer, but here are the most common strategies:
1. Time-Based Rebalancing
- Rebalance every 6 or 12 months
- Simple and systematic
- Great for long-term investors
✅ Works well if you don’t check your portfolio frequently.
2. Threshold-Based Rebalancing
- Rebalance when an asset class deviates more than X% from its target
- Example: If stocks are supposed to be 60%, and they grow to 70%, you rebalance
✅ Keeps your portfolio closer to your risk profile in real time.
3. Hybrid Approach
- Check your portfolio every 6 months, but only rebalance if drift > 5%
✅ Combines discipline with flexibility.
How to Rebalance Step by Step
- Review your target allocation
- Based on your risk tolerance: conservative, moderate, or aggressive
- Assess your current allocation
- Use tools from brokers like Vanguard, Fidelity, or Schwab
- Or use spreadsheet trackers like Google Sheets
- Identify the gaps
- Which asset classes are over or underweight?
- Buy low, sell high
- Sell overweight assets
- Buy underweight ones to restore your original balance
- Minimize costs and taxes
- Use tax-advantaged accounts (IRA, 401k) for rebalancing
- In taxable accounts, watch for capital gains
Tips to Make Rebalancing Easier
- Use new contributions to rebalance (instead of selling)
- Automate with robo-advisors like Betterment or Wealthfront
- Avoid rebalancing too often — small drifts are okay
- Use cash inflows (like dividends) to correct imbalances
Example: Rebalancing a 60/40 Portfolio
Let’s say your portfolio has drifted to:
- 70% Stocks
- 30% Bonds
Target is:
- 60% Stocks
- 40% Bonds
What You Do:
- Sell 10% in stocks
- Buy 10% in bonds
→ Portfolio realigned with your strategy
✅ This limits risk and locks in some gains from the overperforming asset.
When NOT to Rebalance
Avoid rebalancing when:
- The drift is very small (< 2–3%)
- The market is extremely volatile short-term
- You’ll incur major tax penalties
✅ Be strategic, not reactive.
Rebalancing in Different Accounts
Tax-Advantaged Accounts (IRA, 401k):
- Rebalance freely — no capital gains taxes
- Great for strategic reallocations
Taxable Accounts:
- Watch for:
- Capital gains
- Transaction fees
- Use new contributions or dividend reinvestments instead
Final Thoughts: Stay in Control, Not on Autopilot
Rebalancing isn’t about chasing returns — it’s about staying disciplined.
By checking in regularly and making small adjustments, you:
- Reduce risk
- Stay aligned with your financial goals
- Maximize long-term performance
Think of it like tuning up a car — not flashy, but necessary to keep things running smoothly.
So set a reminder. Stay consistent. And remember: the most successful investors are the ones who stick to the plan.