Portfolio rebalancing

Rebalancing means periodically adjusting your holdings back to your target asset allocation.

Why portfolios drift

Suppose you target 60% shares / 40% bonds. If shares surge, you might drift to 75/25 — now riskier than you intended. Left alone, a portfolio quietly becomes more (or less) aggressive than planned.

How rebalancing works

You sell a little of what grew and buy more of what lagged, returning to your target. In effect it enforces "sell high, buy low" as a mechanical rule, and — importantly — keeps your risk level where you want it.

Common approaches

• Time-based: review on a schedule, e.g. once or twice a year.
• Threshold-based: rebalance when an allocation drifts beyond a set band (say 5%).
• With new money: direct fresh contributions to the underweight assets — the cheapest way to rebalance, avoiding sales and taxes.

Watch the costs

Rebalancing can trigger transaction costs and, outside tax-advantaged accounts, taxable gains. Don't overdo it — once or twice a year is plenty for most people.

Key takeaway

Rebalancing isn't about chasing returns; it's about discipline and risk control. A simple annual check keeps your portfolio aligned with your plan.