How to Rebalance Your Investment Portfolio
When to rebalance stocks and bonds, the calendar versus threshold methods, and how to do it without triggering a tax bill.
Rebalancing means selling what has grown and buying what has lagged to return to your target allocation — once a year, or whenever a holding drifts more than five points, is enough for most investors.
What you'll walk away with
Skim these first — then dig into the details below.
- 1Rebalance when any asset class drifts about five percentage points from its target.
- 2Annual rebalancing captures nearly all the benefit for most portfolios.
- 3Do it inside 401(k)s and IRAs first, where trades create no tax consequences.
- 4Directing new contributions to underweight assets rebalances without selling anything.
Reading helps. Calculating makes it real. Free tools — instant results, no signup.
Markets do not move in unison, so a portfolio you set once will not stay where you set it. After a long stock rally, a 70/30 mix can quietly become 85/15 — carrying materially more risk than you chose.
Rebalancing is the maintenance step that pulls it back. It is not about boosting returns; it is about keeping your risk where you intended it to be.
Three ways to rebalance
All three methods work. Pick the one you will actually follow, and avoid checking your allocation so often that you start tinkering.
- Calendar — rebalance on a fixed date each year regardless of market conditions. Simple and easy to automate.
- Threshold — rebalance whenever an asset class moves five percentage points or more from target. More responsive, requires periodic checking.
- Cash flow — direct new contributions and dividends into whatever is underweight. No selling and no taxes.
- A common hybrid: check annually, act only if drift exceeds five points.
How to do it step by step
The mechanics take about twenty minutes once a year. Write your targets down so the decision is arithmetic rather than opinion.
- 1
List every account and the current value of each asset class across all of them.
- 2
Calculate current percentages of the combined total, not of each account individually.
- 3
Compare to your written target allocation and identify any class off by five points or more.
- 4
Execute trades inside tax-advantaged accounts first to avoid capital gains.
- 5
If you must trade in a taxable account, favor selling lots with losses or minimal gains.
Rebalancing without a tax bill
Selling appreciated investments in a taxable brokerage account creates capital gains. There are several ways to avoid or minimize that.
- Do all rebalancing trades inside 401(k)s, IRAs, and HSAs, where trades are not taxable events.
- Turn off automatic dividend reinvestment in taxable accounts and redirect that cash to underweight assets.
- Route new contributions toward whatever is lagging instead of selling winners.
- Pair necessary sales with realized losses elsewhere to offset the gains.
- If you must realize gains, prefer long-term holdings taxed at lower rates than short-term ones.
When you do not need to rebalance
Some portfolios rebalance themselves, and adding manual trades on top only creates work and potential tax drag.
- Target-date funds rebalance internally — see target-date funds explained.
- Robo-advisors handle it automatically as part of their management fee.
- Balanced funds holding a fixed stock and bond mix maintain themselves.
- Portfolios still small and growing fast through contributions stay close to target naturally.
Disclaimer: This page includes AI-assisted educational content reviewed for general accuracy. It is not personalized financial, tax, or legal advice. Verify numbers with a qualified professional and our editorial standards.
Continue reading
Related guides that deepen the same decision.
Asset Allocation by Age: Stocks vs Bonds Formula
A common starting point is to subtract your age from 110 and hold that percentage in stocks, so a 35-year-old would hold roughly 75% stocks and 25% bonds, adjusted for personal risk tolerance.
ReadInvestingTarget-Date Funds Explained: Set-and-Forget Retirement Investing
A target-date fund is a single diversified fund that automatically becomes more conservative as your retirement year approaches, so one holding can serve as an entire portfolio.
ReadTaxesTax-Loss Harvesting: Turn Market Losses into Tax Savings
Tax-loss harvesting means selling an investment that is down to lock in the loss, using it to cancel out capital gains and up to $3,000 of ordinary income, while staying invested in something similar.
ReadReady to plug in your numbers?
Every guide pairs with free calculators — no signup.
Explore all calculators