Rebalance Portfolio: When and How to Adjust Your Investments

Rebalancing your portfolio means adjusting your investments back to your original target mix of stocks, bonds, and other assets. Over time, some investments grow faster than others. Maybe your stocks surge while your bonds stay steady, which shifts your portfolio away from the risk level you're comfortable with. Rebalancing gets you back on track by selling some of the overweight assets and buying more of the underweight ones.

How You Know When It's Time to Rebalance

You can't just rebalance the portfolio randomly and hope for the best. You need clear signals that tell you when it's time to make adjustments. Most investors either check their portfolio on a schedule, like once a year, or wait until their allocation drifts too far from their target.

Both approaches work, but the main idea is having a system you'll actually follow. Below are three key considerations that signal it's time to rebalance your portfolio.

1. Your allocation has drifted significantly from your target

This is the most obvious trigger for rebalancing. If you started with a 70/30 stock-to-bond split and it's now 80/20 because stocks performed well, you're exposed to more risk than you planned for. Set a threshold, most investors use 5% to 10%, and rebalance when any asset class crosses that line.

The drift happens naturally because different assets grow at different rates. Your stocks might return 15% in a year, while your bonds return only 3%. That performance gap slowly pushes your allocation away from your target. Compound returns amplify these differences over time. Even if you never touch your portfolio, market performance alone can make you far from your target within just a few years.

A 70/30 portfolio that gains 15% in stocks and 3% in bonds becomes roughly 72/28 after one year. After five years of similar performance, you could be at 77/23 or further. That's a significant increase in risk exposure that happened automatically without you making any decisions.

2. Your life circumstances or financial goals have changed

Major life events should trigger an immediate portfolio review, regardless of your normal schedule. Your financial priorities and risk tolerance shift dramatically when your life situation changes.

Here are the life events that demand a portfolio review:

• Getting married or divorced changes your household income, expenses, and financial goals overnight.
• Having kids introduces new expenses like childcare and college savings that require more conservative investing to ensure the money is there when you need it.
• Changing careers or buying a house affects your income stability and liquidity needs. A new job might mean higher risk tolerance, while a mortgage means you need accessible cash for maintenance.
• Approaching retirement within 5 to 10 years means it's time to protect your accumulated wealth rather than chase growth. You can't afford to recover from a 40% market drop when you're retiring in three years.

Your investment timeline is constantly shrinking. An asset mix that worked when retirement was 20 years away probably doesn't make sense when it's only 5 years out. These changes affect both how much risk you can afford to take and what you're actually investing in.

3. Market volatility is causing you stress

If checking your portfolio makes you anxious or you're losing sleep over market swings, your risk exposure is probably too high. This emotional reaction is a clear signal that your current allocation doesn't match your actual risk tolerance.

You might have thought you could handle a 90% stock portfolio when you set it up. But seeing it drop 15% in a month feels different in reality than it did on paper. That gut punch of opening your account and seeing thousands of dollars gone is a real experience that reveals your true comfort level.

Rebalancing to a more conservative mix can help you stay invested during downturns rather than panic-selling at the worst possible time. Your portfolio should let you sleep at night; if it doesn't, adjust it. There's no point having an "optimal" allocation on paper if it causes you to make terrible decisions in practice.

How to Actually Rebalance Your Portfolio

There are three main ways to rebalance: doing it yourself manually, using automation tools, or investing in funds that rebalance automatically. Each has different levels of involvement and cost. Pick the method that matches how hands-on you want to be with your investments.

1. Manual rebalancing

Manual rebalancing means you personally review your portfolio, calculate where you're off target, and make the trades needed to get back to your desired allocation. You control every decision, which can help you optimize for taxes and costs.

You'll calculate your current percentages, compare them to your targets, and either sell winners to buy losers or direct new money into underweight assets. The first method is more disciplined and enforces "buy low, sell high" automatically. The second method is easier but lets your winners keep running beyond your target allocation, which means more time before you're back on target.

Here's how to manually rebalance your portfolio

Follow these steps to rebalance your portfolio on your own:

1. Calculate your current allocation

You'll calculate your current percentages, compare them to your targets, and either sell winners to buy losers or direct new money into underweight assets. The first method is more disciplined and enforces "buy low, sell high" automatically. The second method is easier but lets your winners keep running beyond your target allocation, which means more time before you're back on target.

Start by understanding exactly where you stand right now. Add up the total value of each asset class in your portfolio, then divide by your total portfolio value to get the percentages. If you have $70,000 in stocks and $30,000 in bonds out of a $100,000 portfolio, you're at 70/30.

Check all your accounts together. Your 401(k), IRA, and taxable accounts should be treated as a single portfolio, not separate entities. Use a spreadsheet or your brokerage's tools to track this accurately. Make sure you're comparing apples to apples by grouping similar assets. All your US stock funds count as one category, all your bond funds as another.

2. Compare to your target and identify gaps

Write down your target allocation next to your current allocation to see where you've drifted. If your target is 60/40 stocks to bonds but you're actually at 68/32, you're 8 percentage points overweight in stocks. That might not sound like much, but it represents a meaningful increase in risk.

Decide if the drift is large enough to act on. Most experts recommend rebalancing when you're off by 5 percentage points or more. Smaller drifts usually aren't worth the transaction costs and tax implications. A 2% drift doesn't meaningfully change your risk profile and might correct itself next quarter.

3. Execute trades to realign your portfolio

Now comes the actual trading part. Sell portions of overweight assets and use that money to buy underweight ones. In the example above, you'd sell about $8,000 worth of stocks and buy $8,000 in bonds to get back to a 60/40 allocation.

Prioritize making these trades in tax-advantaged accounts, such as 401(k)s and IRAs, to avoid capital gains taxes. In these accounts, you can sell winners without triggering immediate tax consequences. If you're adding new money to your portfolio, allocate it all to underweight assets rather than selling anything. This is a simpler, more tax-efficient approach when possible because you're not realizing any gains.

2. Automatic rebalancing with tools and platforms

Automation removes the manual work from rebalancing by using software to monitor your portfolio and execute trades. Many brokerages and investment platforms now offer features that track your allocation daily and either alert you when rebalancing is needed or automatically make the trades for you.

The main categories of automation tools serve different needs:

• Robo advisors like Betterment and Wealthfront charge between 0.25% to 0.65% annually but handle everything for you. They rebalance when your allocation drifts, reinvest dividends into underweight assets, and use tax loss harvesting to offset gains.
• Portfolio tracking software like Quicken, Sharesight, or Empower calculates drift across multiple accounts and suggests specific trades. These tools monitor but don't execute, giving you control over when and how to rebalance.
• Brokerage rebalancing features let you set drift thresholds like 5% and will alert you or execute trades automatically when you hit those limits. Many major brokerages offer this as a free feature for account holders.

This middle-ground approach gives you more control than robo-advisors while still automating tedious calculations and monitoring.

3. Target date funds approach

Target date funds are all-in-one investments that automatically adjust their stock-to-bond ratio as you get closer to a target retirement year, becoming more conservative over time. You pick a fund based on when you plan to retire, like "Target Date 2050," and it handles all the rebalancing internally, so you don't have to do anything.

The fund managers continuously monitor and adjust the allocation, so you never need to think about rebalancing again. This is the ultimate set-it-and-forget-it approach to investing.

Here's how to leverage this approach

Here's how to implement target date funds in your portfolio:

1. Choose a fund matching your retirement timeline

Find a target date fund close to your expected retirement year. If you're 35 and planning to retire at 65, look for a 2055 target date fund. The fund will start aggressively, maybe 90% stocks, and gradually shift to a more conservative stance as 2055 approaches.

Don't just pick the year you turn 65. Consider when you actually plan to retire, which might be earlier or later than the traditional retirement age. If you plan to work until 70, choose a 2060 fund even if you'll turn 65 in 2055. The fund's allocation should align with your actual timeline, not an arbitrary retirement age.

2. Evaluate the fund's expense ratio and underlying holdings

Check the annual fee before investing a single dollar. Low-cost providers like Vanguard and Fidelity offer target-date funds with expenses of 0.08% to 0.15%, while others can charge 0.75% or more. On a $100,000 investment, that's the difference between paying $150 and $750 per year. Over 30 years, those higher fees can cost you tens of thousands in lost returns.

Look at what the fund actually invests in. It should hold a diversified mix of low-cost index funds covering US, international, and bond markets. Some target date funds have hidden fees in their underlying holdings that add another 0.2% to 0.3% to your total costs. Read the prospectus or use the fund's fact sheet to understand the complete fee structure.

3. Invest consistently and let the fund do its work

Set up automatic contributions to your target-date fund, then leave it alone. The fund managers handle all rebalancing decisions internally, adjusting the mix of stocks, bonds, and other assets over time in accordance with their predetermined glide path.

You don't need to monitor allocation drift or make any trades yourself. The single fund provides complete diversification and automatic rebalancing. Just keep adding money regularly and let the fund's glide path gradually make your portfolio more conservative as you approach retirement. This approach works especially well for people who want to invest without having to think about it.

Smart Tips for Rebalancing Your Portfolio

Rebalancing shouldn't be complicated, but some strategies can save you money and headaches. These tips help you avoid common mistakes that can cost you thousands in taxes and fees over time.

1. Automate your rebalancing to stay consistent

I always recommend automation because consistency beats perfection when it comes to investing. The biggest benefit isn't saving time; it's removing emotion from your decisions.

Here's why automation wins:

• You're not tempted to skip rebalancing because the market "might go up more" or because you're busy with life. The system executes regardless of your mood or market sentiment.
• You avoid panic selling during downturns when fear takes over. Automation follows your predetermined plan, even when your emotions scream for something different.
• You eliminate the procrastination that comes with manual rebalancing. Most investors who try to time their rebalancing end up putting it off for months or years.

Pick either an annual schedule or a drift threshold like 5% to 10%, set it up once through your brokerage, and let it run. The system handles the rest without requiring any ongoing decisions from you.

2. Focus on low-cost index funds and diversification

When building your portfolio, stick to low-cost, diversified index funds instead of individual stocks or expensive actively managed funds. For most investors, a simple three-fund portfolio works perfectly: a total US stock market fund, a total international stock market fund, and a total bond market fund.

This gives you exposure to thousands of companies across the entire market with minimal fees, often 0.03% to 0.15% annually. You could go even simpler with a two-fund portfolio of just stocks and bonds, or add a small allocation to alternative assets like REITs. Keep it simple. The more funds you hold, the harder rebalancing becomes and the more likely you are to abandon your strategy.

Avoid the temptation to chase hot sectors or individual stocks. Boring index funds that track the entire market are exactly what you want. They're not exciting, but they work.

3. Rebalance in tax-advantaged accounts first

Always prioritize rebalancing inside your 401(k), IRA, or other retirement accounts before touching taxable accounts. When you sell investments in a taxable account, you trigger capital gains taxes on any profits. But in a 401(k) or IRA, you can buy and sell freely without immediate tax consequences.

If you need to rebalance across both account types, do as much as possible in the tax-advantaged accounts. Then use new contributions in your taxable accounts to shift toward underweight assets rather than sell. This can save you thousands in taxes over the years while still maintaining your target allocation. The tax savings often exceed any small benefit from more frequent rebalancing.

4. Use new contributions strategically instead of selling

Before selling anything to rebalance, look at whether you can use fresh money instead. If you're adding $500 monthly to your investments and your bonds are underweight, direct all new contributions to bonds until you're back on target.

This costs nothing in transaction fees or taxes, and it's psychologically easier because you're not "selling your winners." The downside is that it takes longer to get back to your target allocation, and it only works if you're regularly adding money to your portfolio. But for most working people making consistent contributions, this is the most tax-efficient way to rebalance.

5. Check your portfolio once per year and stick to it

Stop obsessing over your portfolio every month. Pick one day per year, maybe your birthday, January 1st, or tax day, and review your allocation then. Rebalancing annually provides returns similar to those of more frequent rebalancing while minimizing transaction costs and taxes.

Monthly or quarterly rebalancing usually doesn't improve returns enough to justify the extra trading costs and time. The exception is if your allocation drifts dramatically due to a significant market event like March 2020, in which case an off-schedule rebalance might make sense. But in normal market conditions, annual rebalancing strikes the sweet spot between staying disciplined and avoiding overtrading.

Living Your Rich Life With a Balanced Portfolio

Rebalancing your portfolio is one of those financial tasks that sounds boring but actually protects your money and keeps you on track toward your goals. It forces you to "buy low and sell high" automatically, removes emotion from your investment decisions, and ensures you're not taking on more risk than you intended.

Your rebalancing action plan

You don't need to check your portfolio every day or stress about perfect timing. You just need a system you'll actually follow.

Here's what smart rebalancing looks like in practice:

• Set up automatic rebalancing through your brokerage, or use a target-date fund so you never have to remember to rebalance manually.
• Check your portfolio once per year on a specific date you'll remember, like your birthday or January 1st.
• Prioritize rebalancing in tax-advantaged accounts first to avoid triggering capital gains taxes in your taxable accounts.
• Use new contributions to shift toward underweight assets rather than sell winners whenever possible.

The specific method matters less than having one you'll consistently follow. Whether that's an annual calendar reminder, automatic rebalancing through your brokerage, or a target date fund that handles everything, pick the approach that fits your life.

Rebalancing isn't about chasing returns or beating the market. It's about staying aligned with your personal risk tolerance and financial timeline so you can focus on living your Rich Life instead of worrying about your investments.