What is Rebalancing? Rebalancing is the practice of periodically buying or selling assets to return a portfolio to its target allocation, for example 80% stocks / 20% bonds, after market movements have pushed it away from that target. It enforces a disciplined “sell high, buy low” habit without requiring any market timing or prediction.
Worked example: you start the year at an 80/20 stock/bond split on a $500,000 portfolio ($400,000 stocks, $100,000 bonds). Stocks rally 25% and bonds stay flat. Your portfolio is now $500,000 stocks + $100,000 bonds = $600,000, an 83/17 split. An 80/20 target on $600,000 is $480,000 stocks and $120,000 bonds, so rebalancing means selling $20,000 of stocks and buying $20,000 of bonds, locking in some of the stock gain and restoring your risk level.
| Method | How it works |
|---|---|
| Calendar-based | Rebalance on a fixed schedule (e.g. annually) |
| Threshold-based | Rebalance when allocation drifts more than 5% from target |
| New-money | Direct new contributions to the underweight asset class |
New-money rebalancing is the most tax-efficient in a taxable account, since it avoids triggering capital gains, but it only works while you are still contributing. In retirement, threshold-based rebalancing combined with a Glide Path is common: you rebalance opportunistically while also letting the target allocation itself shift over time.