A portfolio doesn’t stay “balanced” on its own. As markets move, the parts of your portfolio that rise (or fall) fastest naturally take up more (or less) of the total. Rebalancing is the disciplined process of bringing your portfolio back to its intended mix—so your risk level stays aligned with the plan you originally chose, rather than whatever the market happens to do this year.
What Rebalancing Really Does
Rebalancing is designed to keep your targeted allocation across asset classes (and your intended risk exposure) consistent over time. If you never rebalance, you’re effectively letting market performance “decide” your risk level—often without realizing it.
Over long periods, higher-risk assets like stocks can grow to become a larger share of your portfolio. That can increase downside potential during volatile markets. Periodic rebalancing helps prevent that drift.
Rebalancing can potentially help long-term returns in some periods, but the more reliable goal is risk control.
Why a Big Price Move Doesn’t Automatically Mean “Rebalance Now”
Here’s a common misunderstanding: “If stocks drop 10%, I should rebalance.” Not necessarily.
Whether rebalancing is triggered depends on how every asset class moved relative to the others, not just one slice of the portfolio. Your weights change based on the combined effect of all price movements.
So a dramatic move in one area might cause only a small change in its weight—while a smaller move elsewhere could create a bigger weight drift if it’s a larger part of your portfolio.
A Simple Case Study: How Drift Actually Happens
Imagine a hypothetical $50,000 portfolio with four asset classes and these targets:
- U.S. stocks: 30%
- International stocks: 20%
- Emerging market stocks: 10%
- Bonds: 40%
Now suppose prices change like this:
- U.S. stocks: –5%
- International stocks: –10%
- Emerging markets: –20%
- Bonds: +10%
Even though emerging markets fell the most, the biggest weight drift can occur in bonds—because bonds rose and they started as a large chunk of the portfolio. In the example, bonds end up well above their 40% target, which could be enough to trigger a rebalance.
What the rebalance would do
A rules-based approach would generally:
- Sell some of what’s overweight (here, bonds) to move that slice back toward its target, and then
- Buy what’s underweight, starting with the most underweight category (here, emerging markets), then moving to the next most underweight (international stocks), and so on—until you’re close to target again.
This is the mechanical version of “trim what grew, add to what lagged,” done to restore your planned risk profile.
How Often Should Rebalancing Happen?
A key idea is not overtrading. Even if a portfolio is monitored frequently, rebalancing typically happens only when allocations drift far enough from targets to justify action.
In the example’s framework, that tends to result in a couple of rebalancing events per year in an average market environment—more in volatile markets, less in calm ones.
The Point: Consistency, Not Market Timing
Rebalancing isn’t about making short-term bets or trying to “beat the market.” It’s about:
- selecting an allocation that matches your goals and risk tolerance, and
- keeping that allocation consistent as markets push it around