Portfolio Rebalancing

Portfolio rebalancing is the disciplined practice of realigning the weightings of assets in a portfolio to maintain a target allocation. Over time, as different assets earn different returns, the portfolio's actual allocation drifts away from the intended mix. For example, a 60/40 stock-bond portfolio might shift to 70/30 after a strong stock market year.

Rebalancing can be done on a calendar basis, such as quarterly or annually, or when allocations drift beyond a set threshold, such as 5% from the target. Calendar rebalancing is simpler, while threshold-based rebalancing is more responsive to market movements. Most research suggests annual rebalancing is sufficient for most investors.

The mechanical discipline of rebalancing forces investors to sell assets that have performed well and buy those that have underperformed, essentially implementing a systematic buy-low, sell-high strategy. While rebalancing may slightly reduce returns compared to letting winners run during extended bull markets, it consistently reduces portfolio risk and protects against catastrophic losses during downturns.