How to Rebalance Your Investment Portfolio (and How Often It Really Matters)

Imagine this: a few years ago you set up a simple portfolio—maybe 60% in stocks and 40% in bonds. Markets moved, some investments did well, others lagged. Today you check in and discover your portfolio is now 75% stocks and 25% bonds.

Nothing “broke,” but your risk level has quietly changed. If a downturn hits, you may lose more than you ever intended to risk.

That’s where portfolio rebalancing comes in. It’s not flashy, but it’s one of the core habits that helps many investors stay aligned with their goals over time.

This guide explains what portfolio rebalancing is, why it matters, how to do it step by step, and when it may make sense—all in clear, practical language.

What Does It Mean to Rebalance a Portfolio?

Portfolio rebalancing is the process of adjusting your investments back to your target allocation.

• Your target allocation is the mix of assets (for example, 60% stocks, 30% bonds, 10% cash) that fits your:
  • Time horizon
  • Risk tolerance
  • Financial goals

Over time, because different investments grow or fall at different rates, your actual allocation drifts away from that target. Rebalancing means:

For example:

• Starting portfolio: 60% stocks / 40% bonds
• After a strong stock market: 75% stocks / 25% bonds
• Rebalancing action: sell some stocks, buy bonds to move back towards 60/40

You’re not trying to predict the market. You’re simply resetting the risk level you originally chose.

Why Rebalancing Matters for Long-Term Investors

Rebalancing doesn’t guarantee higher returns, but it serves a few important purposes investors often care about.

1. Keeping Risk at a Level You Can Live With

Your asset mix is the main driver of your portfolio’s ups and downs.

• More stocks → typically more growth potential, but bigger swings
• More bonds/cash → generally more stability, but lower expected returns

If you never rebalance, a strong stock market can push your portfolio to be much more aggressive than you intended. That can lead to:

• Larger losses than you’re comfortable with during downturns
• A higher chance of panicking and selling at a bad time

Rebalancing helps keep your risk profile consistent with your original plan.

2. Helping You “Buy Low and Sell High” Systematically

Rebalancing often means:

• Selling part of an asset class that has gone up a lot
• Buying more of an asset class that has lagged

In other words, you’re trimming what’s relatively expensive and adding to what’s relatively cheaper, all based on your predefined plan, not emotion.

This doesn’t guarantee better returns, but it can be a disciplined way to counteract performance-chasing and overreaction to headlines.

3. Supporting Goal-Based Investing

Different goals often require different allocations:

• Long-term growth (retirement in 25 years) → often stock-heavy
• Medium-term goals (college in 8 years) → mixture of growth and stability
• Short-term goals (home down payment in 2–3 years) → more conservative

If you’re not rebalancing, your allocations for each goal may drift out of alignment. Over time, that can make it harder to stay on track.

How to Rebalance Your Portfolio Step by Step

Rebalancing doesn’t need to be complicated. Here’s a straightforward process many investors use.

Step 1: Know Your Target Allocation

Start with clarity:

• What percentage of your overall portfolio do you want in:
  • Stocks (equities)
  • Bonds (fixed income)
  • Cash or cash equivalents
  • Any other asset classes you use (real estate funds, commodities, etc.)

Example target:

• 70% stocks
• 25% bonds
• 5% cash

If you invest in multiple accounts (e.g., workplace retirement plan, brokerage account, IRA), you can:

• Either keep each account with its own target mix, or
• Look at all accounts together as one combined portfolio

What matters most is knowing what you’re aiming for.

Step 2: Check Your Current Allocation

Next, compare your actual allocation to your target.

Most investment platforms show your current allocation by asset class. If not, you can:

1. List each investment.
2. Categorize it (e.g., U.S. stocks, international stocks, bonds, cash).
3. Add up the total value in each category.
4. Divide by the portfolio total to get percentages.

Example:

Then combine categories as needed (e.g., stocks = U.S. + international).

Step 3: Decide How Much Drift You’ll Allow

Rebalancing every time your portfolio moves a tiny bit can be inefficient and costly. Many investors set tolerance bands, such as:

• 5 percentage points away from target (e.g., 70% stocks ± 5%)
• Or 10 percentage points for larger portfolios with more volatility

Example:

• Target: 70% stocks
• Tolerance band: 65%–75%
• If stocks rise to 76% or fall to 64%, you rebalance.

This approach focuses on meaningful differences, not constant tinkering.

Step 4: Choose Your Rebalancing Method

There are three common ways to rebalance:

1. Rebalance with New Contributions

If you’re regularly adding money (for example, monthly contributions to a retirement account), you can direct new money into the underweight assets.

Example:

• Target: 70% stocks / 30% bonds
• Current: 74% stocks / 26% bonds
• Instead of selling stocks, direct new contributions primarily into bonds until the mix moves closer to target.

This approach can be tax-efficient and low-friction, since it may avoid selling and taxable gains in certain accounts.

2. Rebalance by Exchanging Within Accounts

If new contributions aren’t enough, you may:

• Sell part of an overweight asset class
• Buy the underweight asset class

Example:

• Target: 60% stocks / 40% bonds
• Current: 75% stocks / 25% bonds
• Action: sell some stock funds, use proceeds to buy bond funds.

In tax-advantaged accounts (such as certain retirement accounts), this may not trigger immediate taxes. In taxable accounts, it can create capital gains or losses, which investors often weigh carefully.

3. Use Dividends and Interest

Another subtle method:

• When your investments pay dividends or interest, don’t automatically reinvest into the same funds.
• Instead, direct that cash into whichever asset class is currently below its target.

This can gently nudge your allocation back toward your plan over time, again helping manage taxes and trading costs.

When Should You Rebalance? Timing Strategies Compared

There is no single schedule that works for everyone, but several patterns are commonly used.

1. Calendar-Based Rebalancing

You rebalance on a fixed schedule, such as:

• Once a year
• Twice a year (e.g., every 6 months)
• Quarterly

On that date, you:

1. Check your current allocation.
2. If it’s outside your tolerance band, rebalance.
3. If it’s close enough, you may choose to leave it alone.

Pros:

• Simple and easy to remember
• Encourages consistent review without constant monitoring

Cons:

• May miss large drifts between check-in dates

2. Threshold-Based Rebalancing

You rebalance only when drift passes a certain level, such as:

• 5 percentage points away from target for a major asset class
• 10 percentage points away for smaller or more volatile categories

Example:

• Target: 60% stocks
• Actual: 67% stocks → within a 5-point band (55%–65%)? No action.
• Actual: 70% stocks → outside the band → rebalance.

Pros:

• Focuses on meaningful changes, not small noise
• Can be more tax- and cost-conscious

Cons:

• Requires some monitoring or alerts
• Markets can move quickly, which may prompt frequent checks in volatile times

3. Hybrid Approach: Calendar + Threshold

Many investors prefer a mix:

• Check on a regular calendar (e.g., annually)
• Rebalance only when drift exceeds your chosen thresholds

This can keep things structured but flexible, avoiding unnecessary trades while still keeping your portfolio from drifting too far.

Practical Example: Rebalancing a 60/40 Portfolio

Here’s a simple, concrete example to make the process easier to visualize.

Starting portfolio:

• $60,000 in stock funds
• $40,000 in bond funds
• Total: $100,000
• Allocation: 60% stocks / 40% bonds (target)

One year later:

• Stocks grow to $78,000
• Bonds fall slightly to $38,000
• Total: $116,000

New allocation:

• Stocks: $78,000 ÷ $116,000 ≈ 67%
• Bonds: $38,000 ÷ $116,000 ≈ 33%

If your target is 60/40 with a 5-point band, your acceptable range might be:

• Stocks: 55%–65%
• Bonds: 35%–45%

Current 67/33 is outside that band → time to rebalance.

Goal: Get back to 60/40.

• 60% of $116,000 = $69,600 in stocks
• 40% of $116,000 = $46,400 in bonds

Actions:

• Current stocks: $78,000 → need to reduce to $69,600
  • Sell $8,400 of stock funds
• Current bonds: $38,000 → need to increase to $46,400
  • Use $8,400 from stock sale to buy bond funds

After rebalancing:

• Stocks: $69,600 (~60%)
• Bonds: $46,400 (~40%)

You’ve reset your portfolio back to your original risk level.

Key Factors to Consider Before You Rebalance

While the math is straightforward, a few practical issues often shape how people rebalance.

1. Taxes in Taxable Accounts

In taxable investment accounts, selling investments can create:

• Capital gains, which may lead to taxes
• Capital losses, which can sometimes offset gains (depending on local rules)

Some investors try to:

• Prioritize rebalancing in tax-advantaged accounts when possible
• Use new contributions, dividends, and interest to correct small drifts first
• Avoid frequent trades that realize unnecessary gains

It can be helpful to understand how your specific tax situation interacts with rebalancing decisions.

2. Trading Costs and Fees

Some platforms and investments involve:

• Trading commissions
• Bid-ask spreads
• Other transaction fees

High trading costs can make frequent rebalancing less appealing. To manage this, investors may:

• Rebalance less frequently, focusing on larger drifts
• Use more broad, low-cost funds to simplify transactions
• Combine smaller adjustments into fewer, more meaningful trades

3. Time Horizon and Life Changes

As your life changes, your target allocation itself may need updating, which then changes your rebalancing plan.

Common triggers:

• Approaching retirement
• Major life events (marriage, children, inheritance, home purchase)
• Significant changes in income or job stability
• Shifts in your comfort with risk after market experiences

Rebalancing then becomes part of a broader process: reassessing your goals and updating your plan, not just adjusting numbers.

How Often Should You Rebalance Your Portfolio?

There’s no universal “best” schedule, but several patterns have emerged as reasonable starting points.

Common Patterns Many Investors Use

• Once a year (with tolerance bands)
• Twice a year (e.g., every 6 months)
• Threshold-based (when an asset class deviates, say, 5–10 percentage points from target)

Rebalancing too often can:

• Increase trading costs
• Create more taxable events
• Make you feel like you’re constantly reacting to short-term noise

Rebalancing too rarely can:

• Allow your risk profile to drift far from your comfort zone
• Turn a moderate plan into a very aggressive one without you realizing

The balance often comes down to:

• How comfortable you are with volatility
• The complexity of your portfolio
• The tax and fee environment you’re operating in

Simple Rebalancing Checklist ✅

Here’s a quick reference you can revisit when you’re thinking about rebalancing.

🔁 Portfolio Rebalancing At-a-Glance

• 🎯 Clarify your target allocation

  • Example: 70% stocks, 25% bonds, 5% cash

• 📊 Check your current allocation

  • Compare actual percentages with your target

• 📐 Set drift thresholds

  • Decide how far you’ll let allocations move (e.g., ±5 percentage points)

• 💰 Use new contributions first

  • Direct new money toward underweight asset classes

• 🔄 Rebalance by selling/buying when needed

  • Trim overweight assets, add to underweight ones

• 🧾 Consider taxes and fees

  • Prefer tax-advantaged accounts when available
  • Avoid unnecessary trades in taxable accounts

• 🗓️ Choose a schedule

  • For example: review annually, rebalance if outside thresholds

• 🧠 Stay disciplined

  • Follow your plan, not day-to-day market emotions

Rebalancing Across Multiple Accounts

Many people invest through a mix of:

• Workplace retirement plans
• Individual retirement accounts
• Taxable brokerage accounts
• Possibly education or other specialized accounts

You can think about rebalancing in two main ways.

1. Rebalancing Within Each Account

You might:

• Set a target allocation for each account separately
• Adjust that account’s investments to match its own target

This is simple to manage, but can be less efficient if:

• Some accounts have limited investment options
• Tax treatment differs across accounts

2. Rebalancing Across Your Entire Household Portfolio

Another approach is to view all your investments as one big portfolio. Then you:

• Design a single, overall asset allocation
• Use different accounts for different roles

Example:

• Use tax-advantaged accounts for bond funds (if that suits your situation)
• Use taxable accounts more for stock index funds (depending on taxes and preferences)
• Rebalance by shifting where contributions go and by adjusting holdings in the most flexible or tax-favorable accounts

This approach can be more tax- and cost-conscious, but it requires:

• A clear overview of all accounts
• Careful tracking of your overall allocation

Emotional Side of Rebalancing: Why It Can Feel Hard

On paper, rebalancing is simple. In reality, it can challenge emotions in a few ways.

Selling Winners Can Feel Wrong

Rebalancing sometimes means selling part of an investment that has performed well. It may feel like:

• You’re “cutting your winners”
• You’re missing out if the asset keeps rising

But the purpose isn’t to predict the peak. It’s to keep your risk aligned with your plan and avoid becoming unintentionally concentrated in one area.

Buying What’s Been Falling Can Feel Scary

Rebalancing also often involves buying more of what has lagged. That can feel uncomfortable:

• “What if it keeps going down?”
• “Everyone seems negative about this area right now.”

Having a written plan—including your target allocation and thresholds—can make it easier to act based on your long-term strategy, not short-term feelings.

Rebalancing vs. “Set It and Forget It”

Some investment products and services automatically adjust their allocations over time, especially those designed for retirement timelines. This is sometimes referred to as a type of “set it and forget it” strategy.

Even if you use such options, it can still be useful to:

• Understand what rebalancing is doing behind the scenes
• Periodically confirm that the automatic allocation still matches your goals and risk tolerance

For those building their own portfolios, rebalancing is the hands-on version of maintaining a stable risk level over time.

Common Misconceptions About Rebalancing

A few myths can confuse the picture. Clarifying them helps set realistic expectations.

“Rebalancing Always Increases Returns”

Rebalancing can sometimes modestly improve risk-adjusted returns, particularly when markets swing around. But it doesn’t guarantee:

• Higher returns in every period
• Outperformance versus simply holding

Its main role is risk control and discipline, not performance enhancement alone.

“You Need to Rebalance Constantly”

Some investors worry they need to be rebalancing monthly or even weekly. Constant trading can:

• Increase costs
• Create tax issues
• Add stress

In many cases, periodic rebalancing with reasonable thresholds can be more than sufficient.

“Rebalancing Protects You from All Losses”

Rebalancing helps keep your risk consistent, but it does not eliminate market risk. A stock-heavy portfolio can still experience significant declines, even if perfectly rebalanced. The aim is alignment with your chosen risk level, not guaranteed safety.

A Simple Template for Your Own Rebalancing Plan

You can adapt this template to fit your situation and preferences.

📝 Sample Rebalancing Plan

1. Target Allocation

   • 70% stocks
   • 25% bonds
   • 5% cash

2. Tolerance Bands

   • Stocks: 70% ± 5% (65%–75%)
   • Bonds: 25% ± 5% (20%–30%)

3. Review Schedule

   • Once per year in [choose a month]
   • Optional mid-year check-in if markets have been very volatile

4. Primary Rebalancing Method

   • Use new contributions and dividends to buy underweight assets
   • If still outside bands at review time, rebalance by selling/buying

5. Priority Order for Trades

   • First, rebalance within tax-advantaged accounts
   • Second, rebalance in taxable accounts only if drift is substantial

6. Exceptions and Notes

   • Re-evaluate target allocation if:
     • Time horizon shortens significantly
     • Major life events or changes in finances occur
     • Risk tolerance changes meaningfully

Writing this down can make it easier to stay consistent over years, even as markets shift.

Bringing It All Together

Rebalancing is essentially about staying true to the plan you created when you were thinking clearly and long term, rather than reacting in the moment.

By:

• Defining a clear target allocation
• Setting reasonable drift thresholds
• Choosing a practical schedule and method
• Considering taxes, costs, and your time horizon
• And acknowledging the emotional side of sticking to a plan

you create a framework that supports long-term investing discipline.

Markets will rise and fall. Certain assets will go in and out of favor. Rebalancing gives you a simple, structured way to respond: not by guessing the future, but by realigning your portfolio with the goals and risk level you chose on purpose.