How to rebalance your portfolio: simple step-by-step guide
Last updated: April 20265 min readCalculator Tools
Your portfolio drifts over time. If stocks have a great year, they grow to a bigger slice of your pie than you planned. If bonds drop, they shrink. After a few years without rebalancing, your 80/20 portfolio might be 90/10 — meaning you are taking more risk than you signed up for.
Rebalancing means getting back to your target allocation. Here is exactly how to do it.
What is rebalancing?
Rebalancing is the process of adjusting your portfolio back to your target allocation. If your target is 80% stocks and 20% bonds, and stocks have grown to 88%, you either sell some stocks and buy bonds, or direct new money into bonds until the ratio is back to 80/20.
It sounds counterintuitive: you are selling your winners and buying your underperformers. But that is exactly the "sell high, buy low" principle in practice.
When to rebalance
There are two common approaches:
- Calendar-based: Rebalance once or twice a year, regardless of drift. Pick a date — January 1st, your birthday, tax day — and check every year.
- Threshold-based: Rebalance whenever any asset class drifts more than 5 percentage points from your target. Check quarterly. If stocks should be 80% and they hit 85%, rebalance.
Either method works. The worst approach is checking daily and rebalancing constantly. That creates tax events and trading costs. The second worst is never checking at all.
Step-by-step rebalancing process
- Write down your target allocation. For example: 60% US stocks, 20% international stocks, 20% bonds. If you are not sure what your target should be, read our allocation by age guide.
- Check your current allocation. Enter all holdings from every account into the portfolio visualizer. The pie chart shows your actual percentages.
- Compare actual vs. target. Write down the difference. Example: US stocks are 72% (target 60%), international is 15% (target 20%), bonds are 13% (target 20%).
- Calculate the dollar amounts. If your portfolio is $100,000, you need to move $12,000 from US stocks ($72K → $60K), add $5,000 to international ($15K → $20K), and add $7,000 to bonds ($13K → $20K).
- Execute trades. Sell overweight positions and buy underweight ones. Or direct new contributions to underweight asset classes.
Rebalancing in tax-advantaged vs. taxable accounts
Where you rebalance matters for taxes:
- 401k, IRA, Roth IRA: Rebalance freely. No tax consequences for buying or selling inside these accounts. This is the best place to make changes.
- Taxable brokerage accounts: Selling triggers capital gains taxes. Instead of selling, direct new DCA contributions to underweight positions. Or use tax-loss harvesting to offset gains.
- HSA: Same as retirement accounts — no tax impact from trades.
The lazy rebalancing method
If selling and buying feels like too much work, there is a simpler option: just put new money into whatever is underweight.
Getting a bonus? Instead of adding to your already-heavy US stock position, buy international or bonds. Each paycheck, invest into the asset class that is furthest below target. Over time, this naturally brings your allocation back in line without selling anything.
This works especially well when your contributions are large relative to your portfolio size. For a $50,000 portfolio with $1,000/month contributions, new money moves the needle fast.
Common rebalancing mistakes
- Rebalancing too often. Monthly rebalancing creates unnecessary transactions and tax events. Once or twice a year is enough.
- Ignoring tax-advantaged accounts. Always rebalance inside your 401k or IRA first. Zero tax impact.
- Forgetting to look at all accounts together. Your total allocation includes your 401k, IRA, Roth, taxable, and HSA combined. Don't rebalance each account in isolation.
- Chasing performance. Rebalancing means buying the underperformers. If you cannot bring yourself to buy bonds after stocks had a 30% year, rebalancing will be hard.
Tools that help
Blog