What Is Rebalancing and How Often Should You Do It?

The Complete Answer

Rebalancing means restoring your portfolio to its target mix after market moves push it off course. If you set 70% stocks and 30% bonds and a strong stock year drifts you to 78/22, you are now carrying more risk than you chose. Rebalancing sells a little of what grew and buys what lagged to bring you back to 70/30.

It enforces "buy low, sell high" automatically and unemotionally. After a crash, rebalancing has you buying stocks when they are cheap and frightening to hold; after a boom, it trims them when they are expensive. That discipline is the real value — the return boost is modest, but the risk control is meaningful.

Two methods work. Calendar-based rebalancing means checking once or twice a year on a fixed date. Threshold-based means rebalancing only when an asset class drifts more than a set band, commonly 5 percentage points, from its target. Studies show both produce similar results, so pick whichever you will actually follow.

Do it tax-smart. Rebalance first inside IRAs and 401(k)s where selling triggers no tax, and in taxable accounts steer new contributions into the underweight asset so you rarely have to sell at all. Rebalancing more than a couple of times a year usually just adds costs without improving outcomes.