Portfolio Rebalancing: Why and How Often

What rebalancing does

Over time, the assets that rise become a bigger share of your portfolio and the ones that fall shrink. Rebalancing sells some of the winners and buys more of the losers to return to your target mix. It keeps your risk level where you chose it.

It is mostly about risk, not returns

The common pitch is that rebalancing buys low and sells high. Sometimes it does, but the bigger effect is that it stops your portfolio from drifting toward more risk than you intended. After a long bull market, a 60/40 portfolio can quietly become 80/20.

How often

Two sensible rules:

• On a schedule: once a year is enough for most people.
• On a threshold: rebalance when any asset class is more than 5 percentage points off target.

Both work. Rebalancing more often than that adds trading costs and tax without much benefit.

The tax catch

In a taxable account, selling winners triggers tax. Where you can, rebalance inside tax-advantaged accounts first, and in taxable accounts direct new contributions toward the underweight asset instead of selling.

A small example

A 60% stock and 40% bond target drifts to 70/30 after stocks rise. Rebalancing sells enough stocks and buys bonds to return to 60/40. You now hold the risk you originally chose, not the risk the market handed you.