Rebalancing — Putting the Weights Back
- •Winners quietly grow into a larger share over time
- •Left alone, you carry more risk than you chose
- •Once a year, or when a weight drifts 5 points
Why weights drift
Say you start at 60% stocks and 40% bonds. After a few strong years for equities, doing nothing leaves you around 75/25. Without a single decision, your portfolio has become far more aggressive than you chose — and if a sharp fall arrives in that state, the loss is proportionally larger.
| Point | Stocks | Bonds |
|---|---|---|
| Target | 60% | 40% |
| After 3 strong years | 75% | 25% |
| After rebalancing | 60% | 40% |
When to do it
There are two approaches. One is by calendar — check the same month each year. The other is by threshold — act when a weight drifts more than five points from target. More often is not better; monthly rebalancing mostly adds trading costs and tax.
Doing it cheaply
Selling triggers tax and fees, so first look for ways to rebalance without selling. If you invest monthly, directing new money only into the underweight asset gradually restores balance. The same works when reinvesting dividends or interest.
- Direct new contributions to the underweight side
- Adjust inside tax-advantaged accounts first (tax deferred)
- Pair a losing position to offset realized gains
- Use a wider band so you trade less often
Why it feels wrong
Rebalancing asks you to sell what has done well and buy what has not — the opposite of instinct, which makes it hard to execute. That is why writing down when and on what trigger matters. Left to judgment in the moment, it gets postponed, and the drift widens meanwhile.
Frequently Asked Questions
How often should I rebalance?
Once a year is enough for most people. Studies find little long-run difference between annual and quarterly rebalancing, while frequent trading adds cost.
Should I really buy the loser?
Yes, if your reason for holding it still stands. But if the underlying case has fundamentally changed, the plan itself needs review rather than the weight.
Do I need it if I only invest monthly?
Yes, but it is far easier. Simply steering each month's contribution usually does the job, so you rarely need to sell anything.
What if the tax makes it not worth it?
If the tax bill is large, rebalance with new money instead of selling. If that is not enough, adjust inside a tax-advantaged account next.
How do I set the target weights?
By when you need the money and how much decline you can tolerate. The further off the goal, the higher the equity share; the nearer, the lower.