Rebalancing is the process of realigning your portfolio back to its target asset allocation. Over time, market movements cause your allocation to drift from your original targets.
Why Rebalance?
If stocks outperform bonds, your portfolio may become more aggressive than intended. Rebalancing sells overperforming assets and buys underperforming ones, effectively maintaining your risk level and potentially enhancing returns.
When to Rebalance
- Calendar-based: Quarterly, semi-annual, or annual rebalancing
- Threshold-based: Rebalance when allocations drift 5% or more from targets
How to Rebalance
- Sell overweight assets and buy underweight assets
- Direct new contributions to underweight assets
- Use dividend reinvestment to adjust allocations
Tax Consideration
In taxable accounts, consider rebalancing with new money rather than selling to avoid triggering capital gains taxes.
