Rebalancing means periodically returning your portfolio to its target mix of assets. It sounds fussy, but it's one of the few ways to control risk and sell high without relying on a crystal ball.
Why portfolios drift
Different assets grow at different rates. A long bull market in stocks gradually makes them a larger slice of your portfolio than you planned — raising both your potential return and your exposure to the next downturn. Drift is silent: your risk level changes without you ever making a decision.
What rebalancing does
By trimming the assets that have grown beyond their target and adding to those that have shrunk, you mechanically sell what's expensive and buy what's cheap — the opposite of what emotion tempts most investors to do.
Example: a 70/30 stock/bond portfolio drifts to 80/20 after a strong year. Rebalancing sells enough stock and buys enough bonds to restore 70/30, locking in some gains and resetting your risk.
Common methods
| Method | How it works |
|---|---|
| Calendar | Rebalance on a fixed schedule, e.g. once a year. |
| Threshold | Rebalance only when an asset drifts more than a set amount (say 5%) from target. |
| With new money | Direct fresh contributions to the underweight assets — rebalancing without selling. |
The takeaway
Rebalancing is risk control first, return boost second. Don't overdo it — once a year, or on a sensible threshold, is plenty, and watch for taxes and trading costs when you do it in a taxable account.
