Your carefully planned drifts over time. Rebalancing brings it back. Done right, it can boost returns while managing risk.
Why Portfolios Drift
Investments grow at different rates:
Start of year:
- Stocks: $70,000 (70%)
- Bonds: $30,000 (30%)
End of year (stocks up 20%, bonds up 5%):
- Stocks: $84,000 (73%)
- Bonds: $31,500 (27%)
Your 70/30 portfolio is now 73/27. You're taking more risk than intended.
What Rebalancing Does
Rebalancing = selling winners and buying losers to return to your target allocation.
In the example above:
- Sell ~$3,500 of stocks
- Buy ~$3,500 of bonds
- Back to 70/30
Pro Tip
This is "selling high, buying low" on autopilot—the opposite of emotional investing.
Rebalancing Methods
Method 1: Calendar-Based
Rebalance on a schedule:
- Annually (most common)
- Semi-annually
- Quarterly (usually overkill)
Pros: Simple, predictable Cons: May miss big swings
Method 2: Threshold-Based
Rebalance when allocation drifts by a set amount:
- 5% absolute drift (70% → 75%)
- 25% relative drift (70% → 87.5%)
Pros: Responsive to market moves Cons: More monitoring required
Method 3: Hybrid
Check quarterly; only rebalance if drift exceeds threshold.
Tax-Efficient Rebalancing
Do This
In taxable accounts:
- Use new contributions to buy underweight assets
- Redirect dividends to underweight assets
- Sell overweight assets with losses (tax-loss harvesting)
- Sell overweight assets with long-term gains last
In tax-advantaged accounts: Rebalance freely—no tax consequences.
The Data on Rebalancing
| Strategy | Annual Return* | Volatility |
|---|---|---|
| Never rebalance | 8.1% | Higher |
| Annual rebalance | 8.4% | Lower |
| Quarterly rebalance | 8.3% | Lowest |
*Hypothetical 60/40 portfolio over 30 years
Rebalancing slightly improves returns AND reduces volatility. Win-win.
When NOT to Rebalance
Avoid This
- After every small market move
- In taxable accounts without considering tax impact
- If you'd pay short-term capital gains
- When transaction costs exceed benefit
Setting Up Automatic Rebalancing
Most 401k plans and robo-advisors offer automatic rebalancing:
- Log into your account
- Find "automatic rebalancing" settings
- Choose frequency (annual or semi-annual is fine)
- Enable it
Set and forget.
Quick Win
Check if your 401k or IRA has automatic rebalancing turned on. If not, enable it today. It's one of the easiest ways to stay disciplined.