Portfolio rebalancing

Portfolio rebalancing is the practice of buying and selling assets to restore a portfolio's holdings to its target asset allocation after market movements cause the actual weights to drift. If equities rally while bonds lag, a portfolio can end up more equity-heavy, and therefore riskier, than originally intended without any deliberate decision to take on more risk.

Rebalancing is typically triggered on a fixed schedule, such as quarterly or annually, or when an asset class drifts beyond a set threshold, such as five percentage points from its target. Both approaches involve a trade-off between staying close to the target allocation and minimizing transaction costs and, in taxable accounts, realized capital gains; some investors combine rebalancing with tax-loss harvesting to help offset those gains. This differs from a tactical shift in allocation, which deliberately changes the targets rather than restoring old ones.

Rebalancing matters because it enforces a disciplined sell-high, buy-low behavior and keeps a portfolio's risk level consistent with an investor's risk profiling over time. The main pitfalls are rebalancing too frequently, which can erode returns through costs and taxes, and rebalancing too rarely, which lets risk drift far from target; performance is also usually measured against a benchmark index that itself rebalances on a set schedule.