Rebalancing
Rebalancing is buying and selling to bring a portfolio back to its target allocation after price moves have shifted the weights.
A portfolio set at 60% shares and 40% bonds does not stay there. After a strong year for shares it might be 70/30 — riskier than you planned. Rebalancing brings it back by trimming what has grown and adding to what has lagged. It is a simple discipline that keeps risk where you chose it, and it builds in a habit of selling high and buying low. This entry explains why and how to rebalance, and the trade-offs between different rules.
- Category
- Accounting, Tax and Operations
- Reading time
- 4 min
- Also called
- Portfolio rebalancing, Rebalance, Calendar rebalancing
- Updated
Rebalancing in plain words
Over time some investments grow faster than others, so your mix drifts. You might start with 60% in shares and see that rise to 80% after a rally; rebalancing brings it back to the original allocation.1 See Portfolio Allocation.
Because you trim the winners and add to the laggards, rebalancing pushes you to buy low and sell high.1
How to rebalance, step by step
Set target weights
For example 60% shares, 40% bonds.2
Choose a rule
At regular intervals, such as every 6 or 12 months, or when a weight drifts beyond a set percentage.1
Measure current weights
Value each part at market prices.
Calculate trades
How much to sell or buy to return to target.
Use cash flows first
New money and dividends can rebalance without selling.
Mind costs and taxes
Trading and taxes reduce the benefit. See Trading Fees and Commissions.
Worked examples
Example 1 — Drift and correction
CorrectionA $100,000 portfolio at 60/40. Shares rise 30%, bonds are flat.
| Shares | $78,000 (66%) |
| Bonds | $40,000 (34%) |
| To rebalance | Sell ≈ $7,200 shares, buy bonds |
Rebalancing brings risk back to the 60/40 you chose.
Example 2 — Rebalancing after a crash
Buy lowShares fall 30%; the portfolio moves from 60/40 to about 51/49.
| Action | Sell bonds, buy shares at lower prices |
It feels uncomfortable, but it is the rule doing its job — buying what has fallen.
Example 3 — Threshold bands
BandsA rule says rebalance only when a weight drifts more than 5 percentage points from target.
| Shares at 63% | No action |
| Shares at 66% | Rebalance |
Bands avoid frequent small trades while still capping drift.
Rebalancing rules
| Aspect | How it works | Trade-off |
|---|---|---|
| Calendar | Every 6 or 12 months | Simple; may trade when drift is small |
| Threshold | When a weight moves beyond a band | Fewer trades; needs monitoring |
| Cash-flow | Direct new money to underweight parts | No selling; slower |
| Combined | Check on a schedule, act only beyond a band | Balanced approach |
Why rebalance
Risk control
Keeps the portfolio from drifting into more risk than planned. See Drawdown.
Discipline
A rule that acts against fear and greed. See Fear and Greed.
Strategy allocations
Traders can rebalance capital between strategies too.
Diversification
Keeps the spread across assets intact. See Diversification.
Advantages and disadvantages
Advantages
- Keeps risk at the chosen level.
- Builds in buying low and selling high.
- Simple rules, easy to follow.
Disadvantages
- Costs and taxes on each rebalance.
- Can trim winners during long trends.
- Feels uncomfortable after crashes.
Going deeper
Read as far as you need. Each level builds on the one before it.
Drift is normal
Beginner
Different assets earn different returns, so weights always drift. Rebalancing is maintenance, not a market prediction.
Frequency trade-off
Intermediate
Rebalancing very often adds costs; very rarely lets risk drift far. Many investors check on a schedule and act only beyond a band.
Rebalancing and trends
Advanced
In strong, lasting trends, rebalancing sells the rising asset early. In choppy markets that swing back and forth, it tends to help. See Mean Reversion.
Common mistakes
Never rebalancing
Risk drifts upward in long rallies.
Rebalancing too often
Costs eat the benefit.
Skipping it after crashes
That is when it matters most.
Ignoring taxes
Use new contributions and tax-advantaged accounts where possible.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Rebalancing returns a portfolio to its target weights.
- Weights drift because assets earn different returns.
- Use a calendar, a threshold or both.
- It controls risk and builds in buying low, selling high.
- Mind costs and taxes.
Frequently asked questions
How often should I rebalance?
Does rebalancing increase returns?
Can I rebalance without selling?
Further learning
- Portfolio Allocation
Setting the target you rebalance to.
- Diversification
Why the mix matters.
- Drawdown
What uncontrolled drift can do.
- Trading Discipline
Following the rule when it feels wrong.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Investor.gov (SEC). Asset Allocation and Diversification (opens in a new tab) Checked .
- Investor.gov (SEC). Asset Allocation (glossary) (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Asset Allocation (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.