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.

Rebalancing forces a disciplined "sell high, buy low" behavior: to get back to the original 60/40 split, an investor would need to trim some of the now-larger stock allocation and add to the now-smaller bond allocation, effectively selling an asset that has become relatively expensive and buying one that has become relatively cheap. This doesn't guarantee higher returns in every single period, but historically it has reduced portfolio volatility and can add a modest "rebalancing bonus" to long-run returns, particularly in more volatile, mean-reverting asset combinations.

Common rebalancing frequencies are annual and quarterly; rebalancing too frequently can increase trading costs and taxes (in a taxable account) without meaningfully improving results, which is why most of the strategies on this site default to annual rebalancing.