If you built your portfolio with a specific mix—like “mostly stocks with some bonds for stability”—there’s a good chance that mix has shifted without you noticing. That’s normal. Markets move, different investments grow at different speeds, and over time your portfolio can drift away from the risk level you originally chose.
Rebalancing is the simple habit of bringing your portfolio back to its intended target so it continues to match your goals.
What Rebalancing Means (and what it doesn’t)
Rebalancing is not market timing. It’s not about predicting what will happen next.
It’s a practical maintenance task:
- When one part of your portfolio grows faster than the rest, it becomes a larger percentage of your total.
- That can increase (or decrease) your overall risk.
- Rebalancing restores your portfolio to your original plan.
Think of it like rotating tires on a car. You’re not guessing the weather—you’re keeping things balanced so your plan performs the way you designed it.
Why Portfolios Drift in the First Place
Even if you never change your holdings, your allocation can shift because:
- stocks may rise faster than bonds in strong markets
- one sector (like tech or energy) may surge relative to the rest
- international markets may lag or leap ahead
- contributions or withdrawals may go unevenly into one category
A portfolio that started as 70% stocks / 30% bonds can easily become 80/20 after a long bull market—meaning you’re now taking more risk than you signed up for.
The Real Purpose: Managing Risk
The main reason to rebalance is to keep your risk level aligned with:
- your time horizon (how soon you’ll need the money)
- your goals (retirement, a home purchase, education, etc.)
- your comfort level with volatility
If you don’t rebalance, you may end up with a portfolio that feels “fine” until the market drops—then you realize you were carrying more risk than you intended.
Two Simple Ways to Know When to Rebalance
1) Rebalance on a schedule
Choose a regular check-in, such as:
- once a year, or
- twice a year
This approach is simple, and it limits overreacting to short-term market noise.
2) Rebalance when your allocation drifts past a threshold
Instead of using the calendar, you rebalance when your portfolio moves “far enough” away from target. A common rule is:
- rebalance if a major category shifts by about 5 percentage points (or another limit you choose)
This method can reduce unnecessary trades while still keeping risk under control.
Many investors use both: an annual review plus a drift rule.
How to Rebalance Without Making It Complicated
You can rebalance in a few different ways:
Use new contributions first
If you’re still investing regularly, you can often rebalance by directing new money into the areas that are underweight—without selling anything.
Rebalance within tax-advantaged accounts when possible
Accounts like IRAs and workplace retirement plans may allow you to rebalance without immediate tax consequences that can happen in taxable accounts.
If you need to sell in a taxable account, think about taxes
Selling investments in taxable accounts can create capital gains taxes. That doesn’t mean “never rebalance,” but it does mean you should weigh:
- how far the portfolio has drifted
- whether you can rebalance gradually
- whether contributions alone could solve the drift over time
Life Events That Can Signal a Needed Rebalance
Sometimes your allocation should change because you changed—not because markets moved. Rebalancing (or adjusting your target) may be worth considering if you:
- are getting closer to retirement
- changed jobs or income
- took on major new expenses or debt
- are planning a big purchase within a few years
- realized your risk tolerance is lower than you thought
Common Rebalancing Mistakes
- Rebalancing too frequently: can increase costs and tempt you into reactive decisions.
- Waiting for “the perfect time”: rebalancing is about sticking to a plan, not predicting the future.
- Ignoring costs and taxes: these can reduce the benefit of small, constant changes.
- Letting one holding dominate: concentration can quietly become a major risk.
A Simple Rebalancing Checklist
- Write down your target allocation (your “ideal mix”).
- Compare your current allocation to the target.
- Pick a rule: annual check, drift threshold, or both.
- Rebalance using contributions first when possible.
- Be tax-aware if selling in taxable accounts.
- Re-check, then leave it alone until your next planned review.