Portfolio Rebalancing: How and When to Rebalance Your Investments

Over time, your investments grow at different rates. If stocks surge, they can become a much larger share of your portfolio than you intended — quietly increasing your risk. Rebalancing is the process of bringing your portfolio back to its target allocation.

An Example

Suppose your target is 70% stocks and 30% bonds. After a strong year, stocks grow to 80% of the portfolio. Rebalancing means selling some stocks and buying bonds (or directing new money to bonds) to return to 70/30. In effect, you systematically sell high and buy low.

Three Ways to Rebalance

1. Calendar rebalancing: Rebalance on a set schedule, such as once a year.
2. Threshold rebalancing: Rebalance when any asset class drifts more than a set amount — say five percentage points — from its target.
3. Cash-flow rebalancing: Direct new contributions or withdrawals toward underweight assets, avoiding sales.

Minimizing Taxes and Costs

• Rebalance inside tax-advantaged accounts like IRAs and 401(k)s, where trades don't trigger taxes.
• Use new contributions and dividends to buy underweight assets.
• In taxable accounts, consider pairing rebalancing with tax-loss harvesting.

How Often Is Enough?

Research generally suggests that rebalancing once a year or using a modest threshold works well; rebalancing too often adds costs without much benefit. Target-date funds rebalance automatically. Learn more in our diversified portfolio guide.