What Is Rebalancing?
Rebalancing means bringing a portfolio back to its target mix after market moves have pushed it off course. Why it matters, the common ways to do it, and the costs to watch.
In one sentence
Rebalancing. Bringing a portfolio back to its intended mix by selling some of what has grown and buying more of what has lagged, or by directing new money.
How it works
Markets move each part of a portfolio by different amounts, so the mix drifts away from the plan. Rebalancing sells some of what has grown beyond its target and buys what has fallen below it.
| Stocks | Bonds | Total | |
|---|---|---|---|
| After the year | $72,000 (64.3%) | $40,000 (35.7%) | $112,000 |
| Target 60/40 | $67,200 | $44,800 | $112,000 |
| Trade | Sell $4,800 | Buy $4,800 |
Without rebalancing, the portfolio slowly turns into a riskier one than was chosen.
Ways to do it
- On a calendar: once a year, for example.
- By threshold: whenever a part drifts more than a set amount, such as 5 percentage points, from its target.
- With new money: directing contributions to whatever is below target, which avoids selling.
In a taxable account, selling winners can create capital gains tax, so rebalancing inside retirement accounts or with new money is often cheaper.
Learn it properly
- Portfolio Drift and RebalancingPart 5: Building a Portfolio