How to Rebalance Your Investment Portfolio (And Why It Matters)

Investing is often described as a “set-it-and-forget-it” strategy—but that doesn’t mean you never make adjustments. Over time, the different parts of your portfolio will grow at different rates. What starts out as a balanced, well-diversified mix can drift far off target, exposing you to more risk—or less growth—than you intended.

That’s where portfolio rebalancing comes in. It’s a simple, powerful process that keeps your investments aligned with your goals, your risk tolerance, and your long-term strategy. And it’s one of the most overlooked habits among everyday investors.

This guide explains why rebalancing matters, how often to do it, the smartest (and easiest) ways to rebalance, and how to automate the process so your portfolio works hard—even when you’re not watching.

What Is Portfolio Rebalancing?

Rebalancing is the act of restoring your investment portfolio to its original target allocation by buying and selling assets. Over time, market movements will cause your portfolio to drift away from its intended mix.

Example:
Let’s say your target allocation is:

• 70% stocks

• 30% bonds

After a year of strong stock market growth, your portfolio might look like this:

• 80% stocks

• 20% bonds

Now you’re exposed to more risk than intended. Rebalancing brings you back to 70/30 by selling some stocks and buying more bonds.

Why Rebalancing Matters

1. Controls Risk

When a specific asset class outperforms, it begins to dominate your portfolio. Without rebalancing, your portfolio becomes riskier than you may realize.

2. Locks in Gains

Rebalancing forces you to sell high and buy low, a disciplined strategy that helps you capture gains and reinvest in undervalued areas.

3. Keeps You Aligned With Your Plan

Your asset allocation is based on your goals and risk profile. Rebalancing helps you stay true to that plan—even as markets shift.

4. Reduces Emotional Decision-Making

Rebalancing is systematic. It removes the temptation to chase performance or panic during dips.

When Should You Rebalance?

There’s no one-size-fits-all schedule, but here are three popular strategies:

1. Calendar-Based Rebalancing

Rebalance on a regular schedule:

• Once a year (most common)

• Twice a year

• Quarterly

This is simple and easy to automate with most brokers or robo-advisors.

2. Threshold-Based Rebalancing

Only rebalance when your allocation drifts a certain percentage (usually 5–10%) from your target.

Example:
Your target is 60% stocks, but stocks have grown to 66%—that’s a 10% deviation, so it’s time to rebalance.

3. Hybrid Method

Combine both approaches. Check quarterly, but only rebalance if an asset class has drifted 5% or more.

This method adds precision while minimizing unnecessary trades.

How to Rebalance Your Portfolio (Step-by-Step)

Step 1: Review Your Target Allocation

Remind yourself of your ideal asset mix. Examples:

• Aggressive: 90% stocks / 10% bonds

• Balanced: 60% stocks / 40% bonds

• Conservative: 40% stocks / 60% bonds

Make sure your targets still align with your risk tolerance and time horizon.

Step 2: Calculate Your Current Allocation

Check the percentage of your total portfolio in each asset class. Most brokerages and robo-advisors show this in your dashboard.

If not, calculate:

Step 3: Identify the Drift

Compare your current allocation to your target. Any asset class that’s off by more than 5% likely needs adjusting.

Step 4: Make the Adjustments

You have three main ways to rebalance:

a. Sell and Buy

• Sell assets that are overrepresented

• Use proceeds to buy assets that are underrepresented

b. Rebalance With New Contributions

Instead of selling, direct your new investments to the underweighted assets.

Example: Stocks are too high → stop buying stocks and direct your monthly contributions into bonds until the balance is restored.

c. Use Dividends or Cash Flow

If your portfolio generates dividends or interest, reinvest those into underweight categories.

Step 5: Consider Taxes and Fees

If you’re rebalancing in a taxable account:

• Selling appreciated assets may trigger capital gains taxes

• Consider rebalancing with contributions instead of selling

• Tax-loss harvesting can offset gains

In tax-advantaged accounts (like IRAs or 401(k)s), you can rebalance without tax consequences.

Step 6: Automate If Possible

Many platforms (like Fidelity, Schwab, M1 Finance, or robo-advisors) allow automatic rebalancing at set intervals or based on drift thresholds.

This ensures your portfolio stays aligned without manual intervention.

Rebalancing Examples

Example 1: Manual Rebalancing With Calendar Approach

• You rebalance every January

• Your portfolio target is 80% stocks / 20% bonds

• This year: 86% stocks / 14% bonds

• You sell 6% of stocks and buy bonds to return to 80/20

Example 2: Passive Rebalancing With Contributions

• Your current mix: 75% stocks / 25% bonds

• Target: 70/30

• Each month, you invest $500

• You allocate 100% of the next few contributions into bonds until balance is restored

Pros and Cons of Rebalancing

Pros:

• Maintains your desired risk level

• Encourages disciplined investing

• Helps you systematically buy low, sell high

• Easy to automate

Cons:

• May trigger taxes in taxable accounts

• Requires monitoring (unless automated)

• Slight reduction in potential returns during bull markets

FAQs About Rebalancing

How often should I rebalance my portfolio?

Once or twice a year is enough for most people. Use thresholds if you want to rebalance only when necessary.

What if I don’t rebalance?

You may unintentionally become too risky or too conservative, which can hurt your long-term performance.

Is rebalancing only for large portfolios?

No. Even small investors benefit. Consistent allocation matters more than dollar amounts.

Can I rebalance inside my 401(k)?

Yes. Most 401(k) providers offer automatic rebalancing options. You can usually choose between quarterly or annual schedules.

Do I need to rebalance if I use a target-date fund?

No. Target-date funds rebalance for you automatically as your retirement date approaches.

Final Thoughts: Rebalancing Is Self-Care for Your Portfolio

Think of rebalancing like a regular financial checkup. It’s not glamorous, but it’s essential. It ensures your investments continue working for you, rather than drifting into a risky mess.

Whether you prefer a hands-on or hands-off approach, the key is to stay aligned with your goals and maintain discipline. Don’t let your portfolio evolve randomly—guide it back to your plan with smart, consistent rebalancing.

Because building wealth isn’t about chasing returns. It’s about managing risk and staying the course—even when the market tries to knock you off balance.