What is portfolio rebalancing?
Portfolio rebalancing is the process of adjusting your investments to maintain your target asset allocation. Over time, different investments grow at different rates, causing your portfolio to drift from its original allocation. Rebalancing brings it back to your desired mix.
How portfolio drift happens
Starting allocation
- US stocks: 60%
- International stocks: 20%
- Bonds: 20%
Target allocation with $100,000.
After 2 years (no rebalancing)
- US stocks: 70%
- International stocks: 15%
- Bonds: 15%
Portfolio value: $120,000 (20% growth).
Rebalancing strategies
Time-based rebalancing
Rebalance on a fixed schedule regardless of how much your portfolio has drifted.
Quarterly
Every 3 months. More active management.
Semi-annual
Every 6 months. Balanced approach.
Annual
Once per year. Most common choice.
Threshold-based rebalancing
Rebalance when any asset class drifts beyond a certain percentage from target.
5% threshold
More frequent rebalancing. Higher transaction costs.
10% threshold
Moderate approach. Good balance.
15% threshold
Less frequent rebalancing. Lower costs, higher drift.
How to rebalance
Calculate current allocation
Determine what percentage of your portfolio each asset class currently represents. Most brokers provide this information in your account dashboard.
Compare to target
Identify which assets are overweight (above target) and which are underweight (below target). Calculate the dollar amounts needed to adjust.
Use new contributions first
Before selling assets, direct new contributions to underweight asset classes. This minimizes transaction costs and taxes.
Sell high, buy low
If new contributions are not enough, sell portions of overweight assets and use the proceeds to buy underweight assets.
Consider tax implications
In taxable accounts, prioritize rebalancing inside tax-advantaged accounts (401k, IRA) to avoid capital gains taxes when possible. Check the rules where you live.
Benefits of rebalancing
Portfolio benefits
- Maintains risk level - keeps your portfolio aligned with your risk tolerance
- Disciplined approach - forces systematic buying low and selling high
- Prevents concentration - avoids overexposure to any single asset class
Performance benefits
- Enhanced returns - studies show rebalancing can improve long-term returns
- Reduced volatility - smoother portfolio performance over time
- Emotional control - removes emotion from investment decisions
Rebalancing example
Portfolio of $100,000 with a target of 60% stocks and 40% bonds
| Holding | Before rebalancing | After rebalancing |
|---|---|---|
| Stocks | $70,000 (70%, 10% over) | $60,000 (60%, on target) |
| Bonds | $30,000 (30%, 10% under) | $40,000 (40%, on target) |
Action: sell $10,000 of stocks and buy $10,000 of bonds.
Automatic rebalancing options
Target-date funds
Automatically rebalance and adjust allocation over time.
Example: Vanguard Target Retirement 2050.
Robo-advisors
Automated platforms that rebalance for you.
Examples: Betterment, Wealthfront, Vanguard Personal Advisor.
If you would rather build the allocation yourself, compare low-cost building blocks in our index fund database.