What Is Rebalancing? Keeping Your Investment Mix on Target

Rebalancing brings a portfolio back to its original asset allocation mix, as Investor.gov defines it. It becomes necessary because over time some investments grow faster than others, and your holdings drift out of alignment with your goals.

Why does a portfolio drift?

Say you choose a mix of 70% stocks and 30% bonds. After a strong year for stocks, that mix might shift to 78% stocks without you touching anything. Your portfolio is now riskier than you intended. Rebalancing means selling some of what grew and buying more of what lagged, returning to 70/30.

How often should you rebalance?

There is no single right schedule. Common approaches are rebalancing on a calendar (once or twice a year) or when the mix drifts past a set threshold, such as five percentage points. What matters is having a rule, so the decision is not driven by emotion about recent performance. Rebalancing on a schedule also builds in a buy-low, sell-high habit: you trim whatever has run up and add to whatever has lagged, without needing a forecast.

Does rebalancing have costs?

It can. In a taxable brokerage account, selling winners can trigger capital gains taxes, and trading can involve fees. Inside retirement accounts like 401(k)s and IRAs, rebalancing generally has no immediate tax consequence. Some funds, like target-date funds, rebalance automatically inside the fund, which is one reason investors use them.

Frequently asked questions

Is rebalancing the same as timing the market? No. Rebalancing follows a preset rule about your mix. Market timing tries to predict what prices will do next, which even professionals struggle to do consistently.

Can I rebalance without selling? Often, yes. Directing new contributions toward the underweight part of your portfolio nudges the mix back without selling anything or realizing gains.

Sources and further reading: Investor.gov, "Rebalancing" (https://www.investor.gov/introduction-investing/investing-basics/glossary/rebalancing).