A good investment portfolio isn’t something you just set up and then forget about. The market is always changing, and over time, your investments can shift away from your original plan. Rebalancing is like a tune-up for your portfolio. It gets everything back in line with your goals and how much risk you’re comfortable with. Plus, it keeps your investment strategy on the right path and lowers the chance of having too much invested in one part of the market.
Why Rebalancing Matters
When you first create a portfolio, you decide how to split your money into different types of investments, like stocks, bonds, and cash. This division is based on how you feel about risk and what you hope to achieve in the long run.
As the market fluctuates, some investments will grow faster than others. For example, stocks might suddenly go up a lot, becoming a bigger part of your portfolio than you intended. This could mean you’re taking on more risk than you realize. Rebalancing fixes this by selling some of the investments that have done well and using that money to buy more of the ones that haven’t kept pace.
When to Rebalance
There’s no perfect rule for when to rebalance, but most investors benefit from checking their portfolios at least once or twice a year. Here are some common times to consider it:
- Time-based rebalancing
Set a schedule, such as every six or twelve months, to review and adjust your investments. This approach is simple and helps you stay consistent. - Threshold-based rebalancing
Make changes when your asset mix drifts beyond a certain limit. For example, if your target is 60 percent stocks and 40 percent bonds, you might rebalance when one category shifts by more than 5 percent. - Life changes
Major events such as a new job, buying a home, or nearing retirement can change your risk tolerance. These moments are good times to reassess and rebalance.
How to Rebalance
- Review your current allocation
Compare your existing asset percentages to your target mix. - Sell or buy strategically
Sell a portion of assets that have grown too large and use the proceeds to buy more of the underrepresented ones. - Consider tax implications
If you are rebalancing in a taxable account, selling assets may trigger capital gains. You can reduce taxes by rebalancing within retirement accounts or directing new contributions toward underweighted investments. - Keep costs low
Choose low-fee investment options and avoid excessive trading, which can eat into returns.
Stay Disciplined
Rebalancing might seem odd because it means selling what’s been performing well and buying what hasn’t. It requires patience, but it helps you stick to your long-term plan and avoid making emotional decisions when the market is high or low.
Final Thoughts
Rebalancing isn’t about trying to time the market. It’s about keeping your portfolio in good shape. By checking your portfolio regularly and making small adjustments, you can protect your progress, stay aligned with your goals, and ensure your investments work well over time.