Rebalancing

Rebalancing is the process of bringing your portfolio back to your original target allocation. Over time, as different investments go up and down, your portfolio’s mix will drift away from where you started. Rebalancing means selling some of what’s grown and buying more of what hasn’t, to get back to your plan.

How it works

Say you decided on a portfolio of 80% stocks and 20% bonds. After a strong year in the stock market, your portfolio might shift to 88% stocks and 12% bonds. To rebalance, you’d sell some stocks and buy more bonds to return to 80/20.

There are a few approaches. You can rebalance on a schedule (once or twice a year), or you can rebalance when your allocation drifts past a certain threshold (for example, any time an asset class is more than 5% off target). You can also rebalance by directing new contributions toward whichever asset class is underweight.

Why it matters

Without rebalancing, your portfolio gradually becomes riskier than you intended. After a long bull market, you might end up with far more in stocks than you’re comfortable with, which means a downturn will hit harder than expected.

Rebalancing forces a disciplined approach. It naturally pushes you to buy low and sell high, since you’re topping up the underperformers and trimming the outperformers. It’s not exciting, and it can feel counterintuitive to sell your winners, but it keeps your risk in check over time. Our portfolio rebalancing guide walks through the different approaches and when each one makes sense.

A concrete example

Say you start with $100,000 split 80/20 between stocks ($80,000) and bonds ($20,000). After a strong year, stocks grow to $96,000 while bonds stay flat at $20,000. Your total is now $116,000, but your mix has drifted to 83/17. To rebalance back to 80/20, you’d sell $3,200 in stocks and buy $3,200 in bonds, bringing you to $92,800 in stocks and $23,200 in bonds.