What is Rebalancing?
Rebalans
In short
Bringing a drifted portfolio back to its target allocation: trimming the part that grew most and adding to the underweight part, or directing new money there.
Rebalancing means bringing a portfolio whose allocation has drifted back to its target. Say the target was 70/20/10 but stocks rose fast and their share reached 26%. Rebalancing trims the part that grew most and adds to the underweight part, or directs new money there.
Why it is needed
Without rebalancing a portfolio slowly concentrates in whatever grew most — meaning the risk ends up higher than you planned. Rebalancing keeps risk at the target level. There is a side effect too: it automatically makes you sell a little of what got expensive and buy a little of what got cheap — discipline without emotion.
Methods
- Calendar-based: for example once or twice a year.
- Threshold-based: when a part drifts a set amount (say, 5 percentage points) from target.
- With new money: no selling, just directing new contributions to the underweight part. This pairs well with DCA and reduces tax and fee costs.
Be careful
Rebalancing too often raises fees and taxes and cuts a strongly trending asset too early. Rebalancing serves your asset allocation plan; it is not a way to predict the market.
Example
Starting with $20,000, target 70/20/10 (hypothetical). A year later:
- ETF $14,000 → $15,400 (+10%)
- Stocks $4,000 → $6,000 (+50%)
- Cash $2,000 (unchanged)
Total $23,400. Current weights: ETF 65.8%, stocks 25.6%, cash 8.5%.
Target amounts: ETF $23,400 × 70% = $16,380, stocks × 20% = $4,680, cash × 10% = $2,340.
Rebalance: sell $1,320 of stocks, move $980 to the ETF and $340 to cash ($980 + $340 = $1,320). Alternative: sell nothing and direct the next few months of new money only to the ETF and cash.
Mistakes and tips
Set the rebalancing rule in advance (a date or a threshold) — rebalancing by feel usually happens late or wrong.
Where possible, rebalance with new money first: selling can trigger taxes and fees.
Don't react to every small drift — a few percent of deviation is normal.
Frequently asked questions
- How often should I rebalance my portfolio?
- Most people do it once or twice a year, or when a weight drifts meaningfully (for example 5 points) from target. Doing it more often usually just adds cost.
- Does rebalancing reduce returns?
- Because it trims a strongly rising asset, it can sometimes earn less in the short run. Its main purpose is not to boost returns but to keep risk at the planned level.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
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