What is Rebalancing?
Rebalancing means adjusting your portfolio back to its target allocation. If your target is 60% stocks and 40% bonds, and a stock rally pushes it to 75/25, you sell some stocks and buy bonds to restore the 60/40 split. This systematically enforces buying low and selling high.
Rebalancing Strategies
Calendar rebalancing checks allocations at fixed intervals - quarterly or annually. Threshold rebalancing triggers when any asset class drifts more than 5% from its target. Research suggests annual or threshold-based rebalancing performs similarly. Using new contributions to buy underweight assets minimizes transaction costs and tax events.
Key Considerations
Rebalancing in taxable accounts can trigger capital gains taxes. Consider rebalancing within tax-advantaged accounts first. Over-rebalancing (monthly or more frequently) increases costs without improving returns. The primary benefit of rebalancing is risk management, not return enhancement.