What is Portfolio Rebalancing? (Plain English Definition)
Definition: Portfolio rebalancing is the process of realigning the weightings of assets in your portfolio back to your original target allocation.
Portfolio Rebalancing Explained Simply
Portfolio rebalancing is the practice of periodically adjusting your investments to maintain your desired mix of assets. When you first build a portfolio, you choose a target allocation -- for example, 80% stocks and 20% bonds. Over time, as different investments grow at different rates, your actual allocation drifts away from that target. Rebalancing means selling some of what has grown and buying more of what has lagged to get back to your original plan.
Imagine you start with $10,000 split evenly between a stock ETF and a bond ETF -- $5,000 each, a 50/50 allocation. After a strong year for stocks, your stock ETF might grow to $6,500 while your bond ETF only grows to $5,200. Your portfolio is now about 56% stocks and 44% bonds. To rebalance, you would sell some of the stock ETF and buy more of the bond ETF until you are back to 50/50.
Most financial experts recommend rebalancing once or twice a year, or whenever your allocation drifts more than 5 percentage points from your target. Some investors rebalance on a set calendar date, while others use threshold-based triggers. Either approach works well -- the key is having a consistent system.
Portfolio Rebalancing Example
You set a target allocation of 70% stocks (using VTI) and 30% bonds (using BND) with a $50,000 portfolio: $35,000 in VTI and $15,000 in BND. After one year, VTI grows 15% to $40,250 while BND grows 3% to $15,450. Your total is now $55,700, but your allocation has shifted to 72.3% stocks and 27.7% bonds. To rebalance, you would sell about $1,260 of VTI and buy $1,260 of BND, bringing you back to the 70/30 target.
Why Portfolio Rebalancing Matters for ETF Investors
Rebalancing is essential for ETF investors because it enforces a disciplined "buy low, sell high" approach. By selling the assets that have recently outperformed and buying more of those that have underperformed, you are systematically buying at relatively lower prices and selling at relatively higher prices -- exactly what every investor wants to do but few manage to do on their own. Without rebalancing, a portfolio naturally becomes riskier over time as stocks (which tend to grow faster) take up a larger and larger share. An investor who started at 60% stocks could find themselves at 80% stocks after a long bull market, taking on far more risk than they originally intended. Regular rebalancing keeps your risk level consistent with your goals and prevents any single asset class from dominating your portfolio.
Portfolio Rebalancing vs Dollar Cost Averaging (DCA)
| Portfolio Rebalancing | Dollar Cost Averaging (DCA) |
|---|---|
| Portfolio rebalancing is the process of realigning the weightings of assets in your portfolio back to your original target allocation. | See full definition of Dollar Cost Averaging (DCA) |
While portfolio rebalancing and dollar cost averaging (dca) are related concepts, they serve different purposes in the world of ETF investing. Understanding both terms helps you make more informed decisions about which funds to include in your portfolio and how to evaluate their performance.
Related Terms
Deepen your understanding of ETF investing by exploring these related concepts:
Dollar Cost Averaging (DCA)
Dollar cost averaging is the strategy of investing a fixed amount of money at regular intervals regardless of market conditions.
Beta
Beta measures how much an investment's price tends to move relative to the overall market, indicating its volatility compared to a benchmark.
Exchange-Traded Fund
An exchange-traded fund (ETF) is a basket of securities that trades on a stock exchange just like an individual stock.
Index Fund
An index fund is a type of investment fund designed to match the performance of a specific market index, such as the S&P 500.
Dividend
A dividend is a payment made by a company or fund to its shareholders, typically from profits or investment income.
If you’re serious about learning ETF investing properly, we recommend this highly-rated Udemy course that teaches a complete selection framework — from picking profitable ETFs to building a recession-proof portfolio. No finance background needed.