What Is Portfolio Rebalancing?
Portfolio rebalancing means adjusting your investments back to your target allocation. Learn how to rebalance, when to do it, and why it matters for long-term returns.
Definition
Portfolio rebalancing is the process of realigning your portfolio back to its original target allocation by buying and selling assets. Over time, as different investments perform differently, your portfolio's allocation drifts from your target. Rebalancing restores the intended balance between risk and return.
For example, if your target is 70% stocks and 30% bonds, and a stock market rally pushes your portfolio to 80% stocks and 20% bonds, rebalancing involves selling some stocks and buying bonds to get back to 70/30. This may feel counterintuitive -- you are selling your winners -- but it enforces the discipline of buying low and selling high.
There are two main approaches to rebalancing: calendar-based (rebalance on a set schedule, like once per year) and threshold-based (rebalance whenever any allocation drifts more than a set percentage, like 5%, from target). Many robo-advisors and target-date funds rebalance automatically.
Real-World Example
On January 1, your $100,000 portfolio is 70% stocks ($70,000) and 30% bonds ($30,000). By December 31, stocks gained 20% and bonds gained 3%. Your portfolio is now $84,000 stocks and $30,900 bonds ($114,900 total). Stocks are now 73% of your portfolio. To rebalance to 70/30, you sell $3,570 in stocks and buy $3,570 in bonds, bringing you back to $80,430 stocks and $34,470 bonds. You have systematically taken profits from stocks and bought bonds at relatively lower prices.
Why It Matters
Rebalancing is one of the few free lunches in investing. It enforces discipline (sell high, buy low), maintains your intended risk level, and has been shown to slightly boost risk-adjusted returns over long periods. Without rebalancing, a portfolio naturally drifts toward its highest-performing (and often riskiest) asset class, increasing risk exactly when you might not want it to. Rebalancing takes 15 minutes once a year and can significantly improve your investment outcomes.
Get Glen’s Updates
Investing insights, new tools, and whatever I’m building this week. Free. No spam.
Unsubscribe anytime. I respect your inbox more than Congress respects property rights.
Frequently Asked Questions
How often should I rebalance my portfolio?
Once per year is sufficient for most investors. Rebalancing too frequently increases transaction costs and taxes. Some experts suggest rebalancing whenever any asset class drifts more than 5% from its target.
Does rebalancing cost money?
It can trigger transaction costs and capital gains taxes in taxable accounts. You can minimize costs by rebalancing within tax-advantaged accounts (401(k), IRA) where there are no tax consequences, or by directing new contributions to underweight asset classes.
What if I don't rebalance?
Your portfolio will drift toward its best-performing asset class, typically stocks. After a long bull market, you could end up with 90%+ stocks without realizing it. When the market crashes, your losses will be much larger than your target allocation intended.
Related Terms
Recommended Resources
Tools & books I actually use and recommend
SeekingAlpha Premium
Quant ratings, earnings transcripts, and the stock analysis community where I published 300+ articles.
Try SeekingAlphaA Random Walk Down Wall Street
Burton Malkiel's classic case for index investing. The book that convinced millions to stop stock-picking.
View on AmazonThe Little Book of Common Sense Investing
John Bogle's manifesto on why low-cost index funds beat everything else. Straight from the founder of Vanguard.
View on AmazonSome links above are affiliate links. I only recommend products I personally use. See my full disclosures.
Keep Exploring
Asset Allocation by Age
Determine your target allocation before rebalancing.
Read moreGuideBest Robo-Advisors
Services that rebalance your portfolio automatically.
Read moreCalculatorFIRE Calculator
See how rebalancing affects your path to financial independence.
Read moreHubFinancial Glossary
Browse all 106 financial terms.
Read more