Successful investing isn’t just about picking the right stocks or assets—it’s also about knowing when to adjust your portfolio. Over time, as markets rise and fall, your carefully chosen asset allocation can drift out of balance. That’s where rebalancing comes in.
In this in-depth guide, you’ll learn:
- What portfolio rebalancing is and why it matters
- Different rebalancing portfolio strategies used by professionals
- How often you should rebalance
- Tax and cost considerations
- Real-life examples and mistakes to avoid
Let’s dive into how to rebalance your portfolio like a seasoned investor.
Table of Contents
- 1 What Is Portfolio Rebalancing?
- 2 Why Rebalancing Your Portfolio Matters
- 3 Core Rebalancing Portfolio Strategies
- 4 How Often Should You Rebalance?
- 5 Tools and Apps to Help You Rebalance
- 6 Example: Rebalancing in Action
- 7 Tax and Cost Considerations
- 8 Common Mistakes to Avoid
- 9 FAQs about rebalancing portfolio strategies
- 9.1 How do I know when my portfolio is out of balance?
- 9.2 Is rebalancing necessary if I only invest in index funds?
- 9.3 Can I automate portfolio rebalancing?
- 9.4 Should I rebalance my investment portfolio during a market downturn?
- 9.5 What’s the tax-efficient way to rebalance?
- 9.6 Can I rebalance with ETFs?
- 9.7 Should retirees rebalance differently?
- 9.8 How does rebalancing relate to asset allocation?
- 9.9 How often should I check my portfolio?
- 9.10 What is rebalancing drift?
- 9.11 Can I rebalance my portfolio manually?
- 9.12 What happens if I never rebalance?
- 10 Final Thoughts: Rebalancing Is a Discipline, Not a Chore
What Is Portfolio Rebalancing?
Portfolio rebalancing is the process of realigning your asset allocation to maintain your desired risk level and investment goals.
Over time, your investments will perform differently. Some may grow faster than others, shifting your original asset allocation. Rebalancing brings it back into alignment.
Example:
Let’s say your ideal asset mix is:
- 60% stocks
- 30% bonds
- 10% cash
After a year of strong stock market gains, your allocation drifts to:
- 72% stocks
- 20% bonds
- 8% cash
Now your portfolio is riskier than you intended. Rebalancing would involve selling some stocks and buying bonds or cash-equivalent assets to return to your 60/30/10 target.
Why Rebalancing Your Portfolio Matters
Rebalancing is not just about symmetry—it’s about discipline, risk control, and sticking to your investment plan.
Key Benefits:
| Benefit | Description |
|---|---|
| Maintains Risk Tolerance | Keeps your portfolio aligned with your comfort level. |
| Locks In Gains | Sell high-performing assets and buy underperformers (buy low, sell high). |
| Reduces Emotional Decisions | Enforces rules-based investing instead of reacting to market swings. |
| Improves Long-Term Returns | Keeps your plan on track for steady growth. |
According to Vanguard, investors who rebalanced periodically saw better risk-adjusted returns than those who let their portfolios drift.
Core Rebalancing Portfolio Strategies
There are several proven approaches to rebalancing. The best one for you depends on your risk profile, account size, and investment philosophy.
1. Calendar-Based Rebalancing
Rebalance your portfolio at fixed intervals—e.g., quarterly, semi-annually, or annually.
Pros:
- Simple and systematic
- Works well for long-term investors
- Easy to automate
Cons:
- Might miss critical drift in volatile markets
Best For: Passive investors and 401(k) contributors.
2. Threshold-Based Rebalancing
Rebalance when an asset class deviates beyond a set percentage from your target—commonly 5% or 10%.
Example:
- Target: 60% stocks
- Rebalance if stocks rise above 65% or fall below 55%
Pros:
- More responsive to market changes
- Can reduce unnecessary trades
Cons:
- Requires active monitoring
- More complexity than calendar-based
Best For: Investors who want a more dynamic, performance-based system.
3. Hybrid Rebalancing Strategy
Combine time and threshold rules: rebalance at set intervals, but only if drift exceeds a certain percentage.
Example: Check quarterly; rebalance only if any class has drifted by 5%+.
Pros:
- Balances simplicity and responsiveness
- Limits excessive trading
4. Cash Flow Rebalancing (Contributions and Withdrawals)
Use new contributions or withdrawals to bring your allocation back in line, rather than selling assets.
Example:
If your stocks are overweighted, direct new investment funds to bonds instead of stocks.
Pros:
- Reduces transaction costs and taxes
- Ideal for 401(k) or IRA contributions
Best For: Accumulating investors or retirees making regular withdrawals.
5. Rebalancing with Tax-Loss Harvesting
For taxable accounts, combine rebalancing with tax-loss harvesting—selling losing investments to offset capital gains.
Pros:
- Enhances tax efficiency
- Maintains your target allocation
Caution:
Be aware of wash sale rules if reinvesting in similar assets within 30 days.
How Often Should You Rebalance?
There’s no universal answer, but here are general guidelines:
| Strategy | Rebalancing Frequency |
|---|---|
| Calendar-Based | Every 6 or 12 months |
| Threshold-Based | Whenever deviation hits 5–10% |
| Hybrid | Quarterly, only if drift exceeds threshold |
| Cash Flow-Based | Ongoing with deposits/withdrawals |
Tip: Over-rebalancing can increase taxes and transaction costs. Under-rebalancing can increase risk exposure. Find your ideal balance.
Tools and Apps to Help You Rebalance
- Personal Capital – Free rebalancing alerts
- Wealthfront / Betterment – Robo-advisors with automated rebalancing
- Morningstar Portfolio Manager – Asset allocation tracking
- M1 Finance – Pie-based investing with one-click rebalancing
- Excel or Google Sheets – Custom DIY tracking
Example: Rebalancing in Action
Let’s say you invested $100,000 with this target allocation:
- 60% Stocks = $60,000
- 30% Bonds = $30,000
- 10% Cash = $10,000
After 12 months, your portfolio grows to:
- Stocks: $80,000
- Bonds: $27,000
- Cash: $11,000
- Total: $118,000
New percentages:
- Stocks = 67.8%
- Bonds = 22.9%
- Cash = 9.3%
Action:
- Sell $9,000 of stocks
- Buy $8,400 of bonds
- Buy $600 more in cash equivalents
Back to your original 60/30/10 strategy.
Tax and Cost Considerations
Before you rebalance, consider:
1. Taxes
- Selling in a taxable account may trigger capital gains.
- Prefer rebalancing in tax-advantaged accounts (IRA, 401(k)) when possible.
2. Transaction Fees
- Watch for trading commissions, though most brokers now offer free trades.
- Be cautious with mutual fund redemption fees.
3. Minimum Investment Requirements
Some funds or platforms have minimum balances—adjust with care.
Common Mistakes to Avoid
❌ Rebalancing too often and incurring excessive taxes or fees
❌ Letting emotions override the strategy (e.g., “I’ll wait until it bounces back”)
❌ Forgetting to rebalance when adding new assets
❌ Not reviewing your strategy when life circumstances change
FAQs about rebalancing portfolio strategies
How do I know when my portfolio is out of balance?
Use portfolio tracking tools or spreadsheets. Look for allocation drift of 5%+ from your target percentages.
Is rebalancing necessary if I only invest in index funds?
Yes. Even index funds grow at different rates. You still need to rebalance if your overall asset allocation shifts.
Can I automate portfolio rebalancing?
Yes. Robo-advisors like Betterment and Wealthfront offer automatic rebalancing based on thresholds or time intervals.
Should I rebalance my investment portfolio during a market downturn?
Yes. In fact, downturns offer an opportunity to buy undervalued assets and sell those that held value.
What’s the tax-efficient way to rebalance?
Use:
- Tax-advantaged accounts
- New contributions
- Tax-loss harvesting
Avoid unnecessary taxable gains in brokerage accounts.
Can I rebalance with ETFs?
Absolutely. ETFs are ideal for rebalancing due to low fees, tax efficiency, and flexibility.
Should retirees rebalance differently?
Yes. Retirees often rebalance toward more conservative assets and may use withdrawals as part of the rebalancing process.
How does rebalancing relate to asset allocation?
Rebalancing is how you maintain your desired asset allocation over time, especially as market values change.
How often should I check my portfolio?
Once per quarter is ideal for most investors. Avoid daily monitoring, which can lead to emotional decisions.
What is rebalancing drift?
It refers to how far your current allocation has moved from your target. A 5%+ drift is a common signal to rebalance.
Can I rebalance my portfolio manually?
Yes. Many investors use Excel sheets or brokerage tools to track and execute manual rebalancing.
What happens if I never rebalance?
Your portfolio may become overexposed to risky assets, which can lead to severe losses in market downturns.
Final Thoughts: Rebalancing Is a Discipline, Not a Chore
Think of rebalancing not as a hassle—but as your investment health checkup. Whether you use a simple calendar method or a smart hybrid approach, sticking to a clear rebalancing strategy will help you control risk, lock in gains, and stay aligned with your goals.
Professional investors rebalance for a reason—it’s one of the most powerful tools for long-term success.
Ahmad Faishal is now a full-time writer and former Analyst of BPD DIY Bank. He’s Risk Management Certified. Specializing in writing about financial literacy, Faishal acknowledges the need for a world filled with education and understanding of various financial areas including topics related to managing personal finance, money and investing and considers investoguru as the best place for his knowledge and experience to come together.