Quick answer
Rebalancing means bringing your portfolio back to its original asset allocation after market moves have shifted it [1]. You can sell what has grown too large, buy more of what has shrunk, or direct new contributions to the underweight part. Check fees and taxes first.
Key points
- Over time, faster-growing investments take up a bigger share of your portfolio. This is called drift.
- Rebalancing resets the mix to your target, such as 60% stocks and 40% bonds.
- You can rebalance by selling, by buying, or by steering new contributions.
- Common triggers are a calendar date, such as every 6 or 12 months, or a percentage band.
- Selling in a taxable account can create capital gains tax, and trades can carry fees.
#What is rebalancing?
When you choose an asset allocation, you pick target percentages for stocks, bonds and cash. Markets do not respect those targets. Investor.gov, the SEC's investor education site, notes that over time some investments grow faster than others, so your portfolio can drift out of line with your goals [1].
Rebalancing is the fix. Investor.gov defines it as "bringing your portfolio back to your original asset allocation mix" [1]. FINRA, which oversees U.S. brokerage firms, describes it as making regular adjustments so you are still hitting your target allocation over time [2].
#How does a 60/40 portfolio drift?
A 60/40 portfolio holds about 60% stocks and 40% bonds. It is a common teaching example, not a recommendation. The worked example below shows how one strong year for stocks can push the mix away from target. The returns are hypothetical.
Worked example
One year of drift in a $10,000 60/40 portfolio
You start with $6,000 in a stock fund and $4,000 in a bond fund. In a hypothetical year, stocks gain 25% and bonds lose 2%.
- Stocks after the year ($6,000 × 1.25)
- $7,500
- Bonds after the year ($4,000 × 0.98)
- $3,920
- Total portfolio
- $11,420
- New mix (7,500 ÷ 11,420 and 3,920 ÷ 11,420)
- 65.7% stocks / 34.3% bonds
- Target at 60/40 (11,420 × 0.60 and × 0.40)
- $6,852 stocks / $4,568 bonds
- Rebalance by selling: move from stocks to bonds
- $648
- Rebalance with new money only: add to bonds
- $1,080
After one good year for stocks, the portfolio is about 66/34. Moving $648 from stocks to bonds, or adding $1,080 of new money to bonds, brings it back to 60/40.
Hypothetical returns, before fees and taxes. Calculated in Python.
Drift can also build slowly. If stocks grew a hypothetical 8% a year and bonds 3% a year with no rebalancing, the stock share of a 60/40 portfolio would climb past 70% within ten years. The chart shows that path.
Stock share of a 60/40 portfolio with no rebalancing
- Stock share
#Why does drift matter if the portfolio is growing?
A bigger stock share means bigger swings. A portfolio that has drifted to 70% stocks will usually fall further in a downturn than the 60% you chose. Your risk tolerance has not changed; the portfolio has. Lori Schock, a former director of the SEC's Office of Investor Education and Assistance, notes that allocations can get "out of whack" when one area grows much faster than another, and that rebalancing can help you get back on track [3].
Investor.gov also points out a side effect: rebalancing pushes you to sell some of what has risen and buy some of what has lagged [4]. That is a mechanical rule, not a forecast. It does not mean the lagging investment will recover.
#What are the ways to rebalance?
Investor.gov describes three methods [1]. FINRA lists essentially the same three approaches [2].
| Method | How it works | Trade-offs |
|---|---|---|
| Sell and buy | Sell part of the overweight category and use the money to buy the underweight one | Quick and exact, but selling can trigger fees and, in a taxable account, capital gains tax |
| Buy only | Add new money to the underweight category | Avoids selling, but needs spare cash and may take time |
| Redirect contributions | Send ongoing contributions, such as paycheck deposits, to the underweight category until the mix is back | Gentle and low cost, but slow if the drift is large |
A simple rebalancing routine
Write down your target
For example, 60% stocks and 40% bonds.
Pick a trigger
A date, such as once a year, or a band, such as any category moving more than 5 percentage points from target.
Measure the current mix
Add up each category across all your accounts and divide by the total.
Check costs before trading
Look for trading fees, fund redemption fees and possible taxes.
Choose the gentlest fix that works
New contributions first if the gap is small; selling only if needed.
#How often should you rebalance?
There is no single correct schedule. Investor.gov notes that many financial experts suggest rebalancing at a regular interval, such as every six or twelve months, and that a calendar acts as a reminder [1]. FINRA suggests considering it once a year as part of an annual review of your investments [2].
The other approach Investor.gov describes is to rebalance only when the weight of an asset class rises or falls by more than a set percentage [1]. The 5-point band in the routine above is just an example. Whichever you pick, Schock's advice is to check regularly but "try very hard not to obsess over it" [3].
#What does rebalancing cost?
Investor.gov advises checking whether your rebalancing method will trigger transaction fees or tax consequences before you start [1]. Under U.S. federal tax rules as described by the IRS in 2026, selling a capital asset creates a capital gain or loss equal to the difference between your adjusted basis and what you receive, and it is long-term only if you held the asset for more than one year [5]. Rebalancing inside a tax-advantaged account such as a 401(k) generally avoids that immediate tax on each trade: the IRS says 401(k) elective deferrals and investment gains "are not subject to federal income taxes until distributed from the plan" [6], and amounts in a traditional IRA, including earnings, generally are not taxed until distributed [7]. See capital gains tax basics.
Common beginner mistakes
Rebalancing each account separately
Your allocation is the total across all accounts. Fixing one account in isolation can leave the overall mix still off target.
Ignoring taxes on the sale
Selling winners in a taxable account can create a tax bill. Using new contributions or tax-advantaged accounts first can avoid some of it.
Rebalancing too often
Trading every small wobble adds fees and effort without much benefit. A calendar date or a band keeps it occasional.
Treating rebalancing as a market call
It is a rule for keeping risk where you set it, not a prediction that the weaker category will bounce back.
What's the bottom line?
Rebalancing is routine maintenance: markets shift your mix, and you shift it back so your risk matches your plan. Pick a trigger, measure the whole portfolio, check costs and taxes, and use the gentlest method that closes the gap. If you have not set a target yet, start with asset allocation explained.
Frequently asked questions
Does rebalancing increase returns?
That is not its purpose. Rebalancing keeps your risk close to the level you chose. In a period when stocks keep rising, a rebalanced portfolio may end with less than one left to drift.
Should I rebalance during a market crash?
Rebalancing rules apply in both directions. After a fall in stocks, a rebalance would buy stocks to return to target. Whether you do so depends on your plan, costs and comfort with risk.
Do I need to rebalance if I own a target date fund?
Generally not within the fund itself, because the fund manages its own mix. You would still check how it fits with any other accounts you hold.
What is a rebalancing band?
It is a rule to rebalance only when a category drifts more than a set amount from its target, such as 5 percentage points. Investor.gov describes this as an alternative to a fixed schedule.
Sources
Grade A = primary source (regulator, government agency, official rulebook or the index provider's own documents). Numbers in brackets in the text point here.
- U.S. SEC — Investor.gov. Beginners' Guide to Asset Allocation, Diversification, and Rebalancing (2026). Accessed 2026-10-03.A
- FINRA. Asset Allocation and Diversification (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov (Lori Schock). Is It Time to Rebalance Your Investment Portfolio? (2026). Accessed 2026-10-03.A
- U.S. SEC — Investor.gov. Asset Allocation and Diversification (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Topic no. 409, Capital gains and losses (2026). Accessed 2026-10-03.A
- Internal Revenue Service. 401(k) Resource Guide - Plan Participants - 401(k) Plan Overview (2026). Accessed 2026-10-03.A
- Internal Revenue Service. Topic no. 451, Individual retirement arrangements (IRAs) (2026). Accessed 2026-10-03.A
This page is general education, not personal financial, tax or legal advice. Figures in worked examples are hypothetical and calculated before taxes and fees unless stated. Rules and limits change; check the linked primary sources for the current version. How we check every page.
