Rebalancing
Rebalancing is adjusting a portfolio back to its target asset allocation by selling assets that have grown overweight and buying those that have become underweight.
Market movements gradually push a portfolio away from its intended mix. After a strong stock rally, a 60/40 stock-bond portfolio might drift to 70/30, carrying more risk than planned. Rebalancing restores the original proportions.
Example: a $100,000 portfolio starts at 60% stocks and 40% bonds. A year later, stocks have grown to $75,000 and bonds are at $40,000, a 65/35 split of $115,000. Rebalancing to 60/40 means moving about $6,000 from stocks to bonds, ending at $69,000 and $46,000.
Common approaches are calendar-based, such as once a year, or threshold-based, rebalancing whenever an asset class drifts by more than a set amount, such as 5 percentage points. Investors can also rebalance by directing new contributions to underweight assets, which avoids selling.
Rebalancing is mainly about controlling risk, not boosting returns. In taxable accounts, selling winners can trigger capital gains taxes, so many investors rebalance inside tax-advantaged accounts like IRAs and 401(k)s where possible.