Portfolio Rebalancing: Keeping Your Investment Mix on Track
Core Insights
- The “Silent” Risk: Without maintenance, strong stocks can dominate your portfolio, accidentally increasing your risk level over time.
- Sell High, Buy Low: Rebalancing forces you to take profits from winners and reinvest in undervalued assets, a proven long-term strategy.
- Consistency Wins: Whether you rebalance annually or by percentage thresholds, the key is sticking to the plan.
Setting an asset allocation—such as a 60/40 mix of stocks and bonds—is a meaningful first step in building a long-term investment or retirement portfolio. Over time, though, markets rarely move in perfect balance. Stocks may rally, bonds may lag, and your actual allocation can drift away from the risk level you originally chose.
Portfolio rebalancing is the ongoing process of nudging your portfolio back toward its target mix. Rather than trying to time the market, rebalancing helps keep risk in check and supports a more consistent long-term investing experience.
Visualizing Portfolio Drift
Imagine a 60/40 portfolio that experiences a strong stock market rally. The chart below illustrates how this “drift” exposes the investor to higher risk, and how rebalancing restores safety.
Common Rebalancing Strategies
There is no single “best” way to rebalance. Most successful investors choose one of the following methods and apply it consistently.
| Strategy | How It Works | Pros & Cons |
|---|---|---|
| Time-Based | Rebalance on a set schedule (e.g., annually or quarterly). | Simple to automate, but ignores market swings between dates. |
| Threshold-Based | Rebalance only when an asset drifts by +/- 5%. | Tighter risk control, but requires constant monitoring. |
| Cash Flow | Use new deposits or dividends to buy the lagging asset. | Tax-efficient (no selling), but takes longer to correct large drifts. |
Practical Steps to Rebalance
Log in to your brokerage account. Compare your current pie chart to your original target. If your 60% stock target is now 75%, it’s time to act.
Decide if you will sell the winners (and potentially pay capital gains tax) or if you can simply direct your next few monthly contributions into the underweight asset class.
In a 401(k) or IRA, you can trade freely without tax consequences. In a taxable brokerage account, try to use the “Cash Flow” method first to avoid a tax bill.