Rebalancing Your Portfolio
Maintain your target allocation and risk level through systematic portfolio adjustments
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.
The Balance Principle
Rebalancing forces you to "sell high and buy low" by trimming overweight assets and adding to underweight ones, maintaining your risk profile.
How Portfolio Drift Happens
Starting Allocation
Target allocation with $100,000
After 2 Years (No Rebalancing)
Portfolio value: $120,000 (20% growth)
What Happened?
US stocks performed better than international stocks and bonds, growing the portfolio but changing the risk profile:
- • US stocks: $60,000 → $84,000 (40% growth)
- • International: $20,000 → $18,000 (-10% performance)
- • Bonds: $20,000 → $18,000 (-10% performance)
- • Portfolio is now riskier than intended (70% vs 60% stocks)
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 aren't enough, sell portions of overweight assets and use proceeds to buy underweight assets.
Consider Tax Implications
In taxable accounts, prioritize rebalancing in tax-advantaged accounts (401k, IRA) to avoid capital gains taxes when possible.
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: $100,000 | Target: 60% Stocks, 40% Bonds
Before Rebalancing
After Rebalancing
Action: Sell $10,000 of stocks and buy $10,000 of bonds
Rebalancing Considerations
- • Transaction costs can erode benefits if rebalancing too frequently
- • Tax implications in taxable accounts - consider using tax-advantaged accounts
- • Market timing risk - don't try to predict the best time to rebalance
- • Small portfolios may benefit from using new contributions instead of selling
- • Consider using target-date funds for automatic rebalancing
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