Rebalancing 101
Reset your portfolio back to target with simple calendar or threshold rules—no forecasting required.
- Why rebalance at all?
- How rebalancing actually works
- Calendar vs threshold rebalancing
- Practical implementation tips
- Tax & account considerations
- Quick FAQ
- Related guides
- Risk control
- Rules-based
- Beginner & intermediate
Why rebalance
Markets rarely move in lockstep. Over time, strong-performing assets grow to become a larger share of your portfolio, while laggards shrink. If you never rebalance, your carefully chosen asset allocation can drift far from its target.
Rebalancing nudges your portfolio back to its intended risk level. You sell a little of what has recently done well and buy more of what has underperformed, restoring your original mix of stocks, bonds, and other assets.
The goal of rebalancing is not to chase extra return — it’s to prevent your risk from quietly drifting beyond what you signed up for.
How rebalancing actually works
Consider a simple 60% stocks / 40% bonds portfolio. After a strong year for stocks and a flat year for bonds, your mix might drift to 68% stocks / 32% bonds. You now own more risk than you intended.
Rebalancing might look like this:
- Sell enough stock fund units to bring stocks back toward 60%.
- Use the proceeds to buy more bond fund units until bonds are back near 40%.
By doing this, you are mechanically:
- Selling a portion of recent winners at higher prices.
- Buying more of recent laggards at relatively lower prices.
- Keeping your overall risk aligned with your plan.
You can apply the same principle with multiple funds or a mix of ETFs — the key is comparing your current percentages to your target allocation.
Calendar vs threshold rebalancing
Two simple frameworks cover most investor needs:
| Approach | How it works | Pros | Trade-offs |
|---|---|---|---|
| Calendar-based | Rebalance on a set schedule (for example, once or twice per year). | Easy to remember, fewer decisions, good for hands-off investors. | May miss large drifts that happen between check-ins. |
| Threshold-based | Rebalance when an asset class drifts more than a set band (for example, 5–10 percentage points) from target. | Responds to meaningful drift, can reduce unnecessary trades when markets are calm. | Requires occasional monitoring; more complex than a simple calendar rule. |
Either method can work. Pick a simple rule that fits your temperament and stick with it. Consistency matters more than finding the “perfect” rebalancing trigger.
Practical tips for rebalancing
A few small habits can make rebalancing smoother and more tax-efficient:
- Use new contributions first: direct fresh money toward underweight assets to reduce the need to sell.
- Reinvest distributions smartly: point dividends and interest into underweight funds when possible.
- Prefer broad, low-cost ETFs: fewer moving parts and lower fees make rebalancing easier.
- Avoid constant tinkering: set your rules, then let them work. Don’t rebalance based on every headline.
- Check account-level drift: look at your whole portfolio, not just one account at a time.
- Trade thoughtfully: if you must place trades, many investors prefer using limit orders during normal market hours.
For context on how rebalancing fits into the bigger picture, see Buy-and-Hold Indexing.
Tax & account considerations
Rebalancing behaves differently depending on where your investments are held:
- Registered / tax-advantaged accounts: buying and selling usually doesn’t trigger current tax, so you can rebalance more freely according to your rules.
- Taxable accounts: selling can create capital gains. Many investors prioritize using new contributions and distributions to rebalance and only sell when drift is large or when they can offset gains with losses.
The principle stays the same — keep risk aligned with your plan — but the exact implementation can be adjusted to respect tax realities in your jurisdiction.
Rebalancing 101: quick FAQ
What is portfolio rebalancing?
Rebalancing is the process of adjusting your investments back to your target asset allocation after markets have caused them to drift. It usually means selling a little of what has outperformed and buying more of what has lagged.
How often should I rebalance?
Many long-term investors rebalance once or twice a year, or when allocations drift more than a band (for example, 5 percentage points) from target. The key is to choose a reasonable rule and follow it consistently.
Does rebalancing guarantee higher returns?
No. Rebalancing is primarily a risk-control tool. It may sometimes improve risk-adjusted returns by enforcing buy-low/sell-high behaviour, but its main job is to keep your portfolio aligned with your desired risk level.
Where can I learn more?
Explore Asset Allocation, Diversification, Buy-and-Hold Indexing, and the Investing Strategies hub. Use the Tools section to test different long-term plan scenarios.