Rebalancing

Rebalancing resets a portfolio back to its target weights by trimming winners and adding laggards.

A quick example

How to apply it

Rebalance on a schedule (annually) or when a band is breached (say 5 points off target) — whichever comes first. In tax-advantaged accounts rebalancing is free; in taxable ones, prefer adding new money to the underweight side to avoid realising gains.

What it means for you

It enforces the discipline of selling high and buying low.

Picture this

A portfolio starts 60/40 stocks and bonds. After a five-year bull market, stocks have grown to 78% of the account — far riskier than the owner intended, though it feels great. A rebalance sells some stocks and buys bonds, restoring 60/40. When the bull ends and stocks fall 30%, the rebalanced portfolio loses less than the drifted one, and the bonds bought at relative lows cushion the ride. The scenario is rebalancing’s quiet job: it converts winning streaks into safety before the market does it for you, violently.

Common mix-ups

Too often racks up taxes and fees; too rarely lets drift blow up risk.

Key takeaway

Rebalancing mechanically enforces the discipline everyone praises and nobody follows: sell what has run up, buy what has lagged, and keep risk where you intended it. Without it, a winning stock or asset class quietly drifts the portfolio into a riskier shape that only feels comfortable until the turn. Rebalance annually or when a weight moves five points off target, and prefer new money over realising gains in taxable accounts. It converts winning streaks into safety before the market does it violently.

Definitions reviewed by the Investing Glossary editorial team.