Investing

Portfolio Rebalancing.

The maintenance that keeps your portfolio doing what you designed it to do.

A portfolio left unrebalanced drifts from its target allocation — becoming either riskier or more conservative than you intended, without any deliberate decision to change it. Rebalancing restores design intent automatically.

5%drift in any asset class from its target allocation is a common threshold that triggers a rebalance — restoring risk level and creating a disciplined buy-low, sell-high mechanism

The Situation

Why Portfolios Drift

When stocks outperform bonds, your portfolio's equity allocation grows beyond your target. A portfolio designed to be 70% stocks and 30% bonds can easily reach 80/20 after a strong equity run — increasing your risk exposure beyond what you originally chose. The reverse happens when stocks decline. Drift is automatic and inevitable; rebalancing is the correction.

Rebalancing is not a market timing strategy. It is a risk management discipline that restores the portfolio you designed — regardless of what markets have done.
— Worthune Decision Framework

Your portfolio hasn't been rebalanced in over 12 months
You're unsure whether your current portfolio allocation matches your intended target
You don't have a systematic process for when and how to rebalance

The Rebalancing Framework · Steps 1 & 2

When &
How

Step 1: Choose a Rebalancing Trigger — Calendar or Threshold

Calendar rebalancing: rebalance on a fixed schedule (annually or semi-annually). Threshold rebalancing: rebalance when any asset class drifts more than 5 percentage points from target. Threshold rebalancing is more tax-efficient (fewer transactions) and responsive; calendar is simpler. Both work effectively.

Calendar or threshold — choose one

Step 2: Calculate Your Current vs Target Allocation

Log into all investment accounts and calculate your current allocation across all accounts combined. Compare to your target. If equities are above target by more than your chosen threshold, you're overweight equities and due to rebalance.

Measure the actual drift

Executing Rebalancing · Steps 3 & 4

Tax-Efficient &
Method

Step 3: Rebalance Tax-Efficiently

In tax-advantaged accounts (401k, IRA): sell overweight assets and buy underweight assets freely — no tax consequences. In taxable accounts: prioritize rebalancing through new contributions (buying the underweight asset) and dividends before selling anything, to avoid triggering capital gains.

Tax-advantaged rebalancing first

Step 4: Use New Contributions to Rebalance First

Before selling anything, direct new monthly contributions to the underweight asset class. This 'contribution rebalancing' costs nothing in transaction fees or taxes and naturally corrects drift over time. Only sell overweight positions when contribution rebalancing alone can't close the gap in a reasonable time.

New contributions are zero-cost rebalancing

Maintaining the System · Steps 5 & 6

Review &
Simplify

Step 5: Review Your Target Allocation, Not Just Your Drift

Rebalancing restores your original target — but periodically ask whether that target still reflects your situation. Timeline shortens as you age. Risk tolerance may have changed based on experience. Major life events alter financial goals. Rebalancing is the time to confirm the target is still right, not just to restore it mechanically.

Confirm the target is still right

Step 6: Use Target-Date Funds to Automate Rebalancing Entirely

If your retirement assets are primarily in a 401(k) or IRA, a target-date fund handles allocation and rebalancing automatically — adjusting the equity/bond mix as you approach retirement. This is a fully adequate solution for most investors and eliminates the manual rebalancing decision entirely.

Target-date funds automate everything

After the Work

Your Rebalancing Status

After reviewing your portfolio:

On Track

Allocation within target, systematic process in place

Your portfolio reflects your intended risk level. Continue the scheduled review and rebalance when thresholds are triggered.

Maintain the schedule →

Drift Detected

Allocation has moved beyond target

Rebalance through new contributions first, tax-advantaged accounts second, taxable account sales last.

Rebalance tax-efficiently →

No System

No rebalancing process established

Choose your trigger (calendar or 5% threshold), calculate your current allocation, and execute the first rebalance this month.

Establish the process →

A portfolio designed for your risk tolerance and left unmanaged gradually becomes a portfolio designed for someone else's.

Next Step

Rebalance Your Portfolio

Use Worthune's rebalancing calculator to measure your current allocation drift, plan the most tax-efficient correction sequence, and set your rebalancing trigger.

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Portfolio Rebalancing: When and How to Do It

Portfolio Rebalancing.