How to Rebalance Your Portfolio
Last updated: March 2026
Learn when and how to rebalance your ETF portfolio to maintain your target allocation. Covers threshold-based and calendar-based approaches with tax-smart techniques.
Step 1: Understand Why Rebalancing Matters
Over time, different assets in your portfolio grow at different rates, causing your actual allocation to drift from your target. If you started with eighty percent stocks and twenty percent bonds and stocks outperformed, you might find yourself at ninety percent stocks and ten percent bonds after a few years. This means you are taking on more risk than you originally intended. Rebalancing brings your portfolio back to its target allocation by selling some of the overperforming assets and buying more of the underperforming ones. This disciplined approach forces you to buy low and sell high systematically. Without rebalancing, your portfolio gradually becomes riskier than you planned.
Step 2: Choose Your Rebalancing Method
There are two primary approaches. Calendar-based rebalancing means you check and adjust your portfolio on a fixed schedule, such as once per year, every six months, or quarterly. Annual rebalancing on a specific date works well for most investors. Threshold-based rebalancing means you only rebalance when an asset class drifts beyond a set percentage from its target, such as five percentage points. For example, if your stock target is seventy percent and it reaches seventy-five percent or drops to sixty-five percent, you rebalance. Research suggests both methods produce similar long-term results. Threshold-based is theoretically more efficient but requires more monitoring. Calendar-based is simpler and perfectly adequate.
Step 3: Calculate Your Current Allocation
Log into all your investment accounts and note the current value of each holding. If you have multiple accounts, combine them to see your total portfolio allocation. Calculate the percentage each asset class represents of your total portfolio. For example, if your total portfolio is one hundred thousand dollars with sixty-five thousand in US stocks, fifteen thousand in international stocks, and twenty thousand in bonds, your current allocation is sixty-five percent US stocks, fifteen percent international, and twenty percent bonds. Compare this to your target allocation. If your target was sixty percent US, twenty percent international, and twenty percent bonds, you know US stocks are overweight and international stocks are underweight.
Step 4: Rebalance Through New Contributions First
The most tax-efficient way to rebalance is by directing new contributions toward underweight asset classes rather than selling overweight positions. Using the example above, you would direct your next several monthly contributions entirely to international stock ETFs until that allocation reaches its twenty percent target. This avoids selling, which means no capital gains taxes in taxable accounts and no transaction costs. For most investors with regular contributions, this contribution-based rebalancing handles most drift without ever needing to sell. Only if the drift is too large to correct through contributions in a reasonable timeframe should you consider selling overweight positions.
Step 5: Execute Sells and Buys When Necessary
If contribution-based rebalancing is insufficient, you will need to sell overweight positions and buy underweight ones. In tax-advantaged accounts like IRAs and 401k plans, you can rebalance freely without tax consequences. In taxable accounts, be strategic. Sell shares with losses first to harvest tax benefits. If you must sell shares at a gain, sell shares held longer than one year to qualify for lower long-term capital gains rates. Use specific lot identification to choose the most tax-efficient shares to sell. Execute your trades as close together as possible to avoid market timing effects. Many brokers offer automatic rebalancing features that handle this process for you.
Step 6: Set Up Monitoring and Reminders
If you use calendar-based rebalancing, set a recurring reminder on your calendar for the same date each year. Many investors choose their birthday, January first, or tax day as their annual rebalancing date. If you use threshold-based rebalancing, check your allocation monthly or set up alerts through your brokerage platform if available. Some brokers and robo-advisors offer automatic rebalancing that handles everything for you. Whether manual or automatic, consistency is what matters most. Do not skip rebalancing because the market feels uncertain. Those uncertain times are often when rebalancing is most valuable because it forces you to buy assets that have become cheaper.
Pro Tips
- ✓Rebalance in tax-advantaged accounts first where there are no tax consequences for selling.
- ✓Use new contributions to rebalance whenever possible to avoid triggering capital gains taxes.
- ✓Set a calendar reminder for one specific date per year to review and rebalance your entire portfolio.
- ✓Consider a target date ETF if you want automatic rebalancing without any manual effort.
- ✓Do not rebalance more than quarterly because more frequent rebalancing increases costs without improving returns.
Common Mistakes to Avoid
- ✗Never rebalancing and letting stock allocation drift much higher than intended, dramatically increasing portfolio risk.
- ✗Rebalancing too frequently, which generates unnecessary transaction costs and tax events.
- ✗Only looking at individual accounts instead of your total portfolio across all accounts when calculating allocation percentages.
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