Rebalancing

Rebalancing is the practice of periodically adjusting a portfolio's holdings back to their original target allocation. Because different asset classes grow at different rates, a portfolio that starts at, say, 60% stocks and 40% bonds will drift over time as stocks outgrow or underperform bonds. After a strong bull market, that same portfolio might have drifted to 75% stocks and 25% bonds without a single new dollar being added — quietly becoming far riskier than the investor intended.

Rebalancing forces a disciplined sell-high, buy-low behavior: to get back to the original 60/40 split, an investor trims some of the now-larger stock allocation and adds to the now-smaller bond allocation, effectively selling an asset that has become relatively expensive and buying one that has become relatively cheap. This does not guarantee higher returns in every period, but historically it has reduced portfolio volatility and can add a modest rebalancing bonus to long-run returns, particularly among volatile assets with low correlation to one another.

Common rebalancing frequencies are annual and quarterly, or a threshold rule that triggers only when an asset drifts more than about 5 percentage points from its target. Rebalancing too frequently can increase trading costs and taxes in a taxable account without meaningfully improving results, which is why most strategies on this site default to annual rebalancing.

If you are still adding money to your portfolio, you can often rebalance without selling anything by directing new contributions toward whichever assets are underweight — a tax-friendly approach that pairs naturally with dollar-cost averaging. Our rebalancing calculator shows exactly how much of each asset to buy or sell to return to your targets.