Say you set up a portfolio with 70% stocks and 30% bonds. Then stocks have a great couple of years. Without doing anything, you might now be at 80/20 — more aggressive than you planned. Rebalancing is the routine of nudging your portfolio back to your intended mix.
Why rebalancing matters
- It controls risk. Your allocation reflects how much volatility you can handle. Drift quietly changes that.
- It enforces discipline. You sell some of what’s gone up and buy what’s lagged — a built-in “buy low, sell high” without guessing.
- It keeps you aligned with your plan as you move along your age-based allocation.
Rebalancing isn’t mainly about boosting returns. In a long bull market, it may even slightly reduce them. Its job is keeping risk where you want it.
How often?
There are two common approaches:
- Calendar-based: rebalance once a year on a set date — your birthday, tax time, or New Year’s.
- Threshold-based: rebalance whenever an asset class drifts more than, say, 5 percentage points from its target.
Many people combine them: check once a year, and only act if something is meaningfully off. Rebalancing monthly is usually overkill and can rack up taxes and effort.
Three ways to rebalance
1. Redirect new contributions
The gentlest method. If you’re overweight in stocks, send new money into bonds until things even out. No selling, no taxes. Works well if you’re still adding money regularly through dollar-cost averaging.
2. Sell and buy inside tax-advantaged accounts
Trades inside a 401(k), IRA, or HSA don’t trigger taxes. If you need to sell, do it here first.
3. Sell and buy in a taxable account
This can trigger capital gains tax. If you must, prefer selling holdings with losses or long-term gains, and consider pairing sales with tax-loss harvesting.
A quick example
Target: 70% stocks / 30% bonds. Current portfolio: $100,000, with $80,000 in stocks and $20,000 in bonds (80/20).
- Target stock amount: $70,000 → sell $10,000 of stocks.
- Target bond amount: $30,000 → buy $10,000 of bonds.
If you’re contributing $1,000 a month, you could instead put all of it into bonds for several months and close much of the gap without selling.
Look at all your accounts together
Your allocation is the combined total across your 401(k), IRAs, and taxable accounts. You can rebalance in whichever account is most tax-efficient. A simple spreadsheet listing each fund and its value makes this easy. See brokerage vs. retirement accounts for how they work together.
The low-effort options
- Target-date funds rebalance automatically.
- Balanced funds hold a fixed stock/bond mix and rebalance internally.
- Many 401(k) plans offer an automatic rebalancing setting — check yours.
- Robo-advisers rebalance for a fee.
Whatever you use, keep an eye on expense ratios.
Bottom line
Check your allocation once a year, rebalance if it’s drifted more than about 5 points, and do it with new contributions or inside retirement accounts when you can. It’s a 20-minute annual habit that keeps your risk in line with your plan. Investor.gov has a short guide to allocation and rebalancing if you’d like another explanation.
For education only; not investment advice.
