Rebalancing
Rebalancing is the process of periodically adjusting a portfolio back to its target asset allocation, since different investments grow at different rates and can drift the mix over time.
Why it matters
- Without rebalancing, a portfolio can gradually take on more risk than originally intended as stocks outgrow bonds in a bull market.
- Common approaches include rebalancing on a fixed schedule (e.g., annually) or when an allocation drifts past a set threshold.
- Rebalancing in a taxable account can trigger capital gains, so tax impact is worth considering.
Simple example
- A target 60% stocks / 40% bonds portfolio might drift to 70/30 after a strong stock market run — rebalancing would sell some stocks and buy bonds to return to 60/40.
- Some investors rebalance by directing new contributions toward whichever asset class has fallen below target, avoiding the need to sell anything.