Portfolio rebalancing
Understand why portfolios drift from their targets and the tradeoffs involved in bringing them back.
Rebalancing means moving a portfolio back toward its target allocation. Drift happens because investments earn different returns: the strongest performers become a larger share of the account while weaker performers become smaller.
Why rebalance?
A target allocation represents an intended balance of risk and return. If a 60% stock target grows to 75%, the portfolio may now carry more equity risk than the investor chose—even though no deliberate change was made.
Rebalancing restores the intended exposure. It is risk maintenance, not a claim that recent winners will soon lose or recent losers will recover.
More than one way to get there
A portfolio can be rebalanced by selling overweight holdings and buying underweight holdings. New contributions, dividends, or withdrawals can also be directed in ways that reduce drift with fewer sales.
The mathematically exact trade is not always the best real-world trade. Taxes, transaction costs, bid-ask spreads, restricted holdings, minimum trade sizes, and near-term cash needs can change the decision.
How often?
Common approaches review on a calendar schedule or when an allocation moves outside a chosen tolerance band. Rebalancing too frequently can create unnecessary costs and activity; waiting too long can allow risk to move far from the target.
Use the Rebalancing tool to understand the direction and approximate size of trades. Confirm the current holdings, target, tax consequences, and account restrictions before placing any order. Investor.gov provides a broader guide to allocation and rebalancing.