Rebalancing

Buying and selling investments to bring a portfolio back to its target mix after market movements have pushed it off course.

What it means

As markets move, the parts of a portfolio grow at different rates and its mix drifts. Rebalancing restores the intended asset allocation, usually by selling some of what has grown and buying what has lagged, or by directing new contributions to the underweight assets. Common approaches are rebalancing on a schedule, such as once a year, or whenever an asset drifts past a set threshold.

Rebalancing is mainly about keeping risk at the chosen level, not boosting returns. Selling in a taxable account can trigger capital gains tax, so many investors rebalance inside retirement accounts or with new money where possible. Target-date and balanced funds rebalance automatically.

Example

Suppose a $100,000 portfolio targets 60% stocks and 40% bonds. After a strong year for stocks it holds $70,000 in stocks and $30,000 in bonds. Selling $10,000 of stocks and buying $10,000 of bonds restores the 60/40 mix.

How it’s used

Annual portfolio check-ups
Keeping risk in line as retirement approaches
Responding to large market swings without abandoning a plan

Strengths and weaknesses

Strengths

Keeps portfolio risk aligned with goals
Builds in a disciplined sell-high, buy-low habit
Can be largely automated

Weaknesses

Can trigger taxes and trading costs in taxable accounts
May mean selling assets that keep rising
Rebalancing too often adds cost without much benefit

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.