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
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
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
Setting Up Automatic Rebalancing
Most 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.