Even a well-diversified portfolio can drift out of alignment over time. Periodically reviewing your investment strategy and rebalancing is one of the most important habits for long-term financial success.

What Is Portfolio Rebalancing?

Rebalancing is the process of adjusting your holdings to bring them back to their original target asset allocation. For example, if your plan is 70% stocks and 30% bonds, strong stock performance might shift that to 80/20 — increasing your risk beyond what you intended. Rebalancing means selling some stocks and buying bonds to restore your intended ratio.

Why Rebalance?

The primary reason is to manage risk. When one asset class outperforms, it becomes a larger portion of your portfolio — and if it later declines, you get hit harder. Rebalancing forces you to systematically sell high and buy low, a core principle of successful investing.

Two Approaches

  • Time-Based Rebalancing: Review on a set schedule — every six or twelve months — and adjust holdings as needed regardless of market performance. Simple and disciplined.
  • Threshold-Based Rebalancing: Set a tolerance band around your target (e.g., ±5%). If stocks rise above or fall below that band, rebalance. More reactive to market movements and potentially more efficient in volatile periods.

A Practical Example

Start with $100,000: $70,000 in stocks, $30,000 in bonds. After a strong year, stocks grow to $85,000 and bonds to $32,000 — a 73/27 split. To restore your 70/30 target, sell about $3,500 of stocks and buy $3,500 of bonds. You’ve locked in gains and returned to your intended risk level.

Rebalancing may feel counterintuitive — selling your winners and buying your laggards — but it is a crucial discipline. It’s not about timing the market. It’s about maintaining the risk level you decided was right for your plan.