The Moment
It has been a year since you last checked your portfolio allocation. Stocks had a strong year — your 75/25 stock/bond target is now 82/18. The portfolio has drifted, and your risk profile no longer matches your plan.
Rebalancing is the mechanical discipline that forces you to sell high and buy low — the opposite of what most investors do emotionally. It is not exciting. It is not sexy. It adds roughly 0.5-1% in annual returns over time through disciplined risk management.
How to Rebalance
Step 1 — Check your current allocation. Log into your brokerage accounts and note the percentage in each asset class (US stocks, international stocks, bonds, cash).
Step 2 — Compare to your target. If your target is 70% stocks / 25% bonds / 5% cash and you are currently at 78/18/4, your stocks are overweight by 8%.
Step 3 — Rebalance if drift exceeds 5%. Small drifts (1-3%) are not worth the transaction costs and potential tax impact. Rebalance only when an asset class has drifted more than 5 percentage points from target.
Step 4 — Execute in the most tax-efficient order: 1. New contributions: Direct new 401(k) or IRA contributions to the underweight asset class. This rebalances without selling anything. 2. Within tax-advantaged accounts: Buy/sell within your 401(k) or IRA — no tax consequences. 3. Within taxable accounts (last resort): Selling winners in taxable accounts triggers capital gains tax. Use tax-loss harvesting to offset gains if possible.
Step 5 — Set a calendar reminder for next year. Rebalancing once per year is optimal. More frequent rebalancing adds transaction costs and taxes without meaningful improvement.
Run Your Numbers
See how rebalancing affects long-term portfolio growth.
Compound Growth Projector
What to explore next
- →What is the optimal stock/bond split for my age?
- →How do I rebalance across multiple accounts?
- →Should I use threshold rebalancing instead of calendar rebalancing?
Frequently Asked Questions
Should I rebalance after a market crash?
Yes — this is when rebalancing adds the most value. After a crash, stocks are underweight relative to your target. Rebalancing means selling bonds (which held steady) and buying stocks (which are cheap). This is systematically buying low. It is emotionally difficult but mathematically powerful.
Do target-date funds rebalance automatically?
Yes. If you use a target-date fund, it rebalances internally and you do not need to do anything. This is one of the main advantages of target-date funds — built-in discipline with zero effort.