A portfolio usually holds different types of assets, such as stocks, bonds and gold. Because their prices move differently, your mix drifts over time. A portfolio that started as 60% stocks and 40% bonds can quietly become 75% stocks after a strong year, which means you’re taking more risk than you signed up for.
Rebalancing brings the portfolio back to its target mix. The harder question is how often to do it.
Quick answer: For most long-term investors, checking once or twice a year and rebalancing only when an asset class has drifted about 5 percentage points from its target is enough. Rebalancing more often adds trading costs and taxes without meaningfully improving results, according to Vanguard’s research on rebalancing strategies.
What Is Portfolio Rebalancing?
Portfolio rebalancing means buying and selling assets to restore your original allocation, the percentage of your money in each asset class.
Your target allocation should reflect your goals, time horizon and risk tolerance. A 30-year-old saving for retirement might hold 80% stocks and 20% bonds, while someone close to retirement might prefer 40% stocks and 60% bonds.
Markets don’t respect those targets. Stocks tend to grow faster than bonds over long periods, so an untouched portfolio usually becomes more stock-heavy, and more volatile, every year. Rebalancing is how you keep your risk level where you intended it to be.
Most brokers, including Interactive Brokers and Brokstock, show your current allocation and make it easy to place the trades. Many robo-advisors and target-date funds rebalance automatically.
Why Rebalancing Matters
It keeps your risk under control
This is the main reason to rebalance. In Vanguard’s study of US stock and bond portfolios from 1926 to 2009, a 60/40 portfolio that was never rebalanced drifted to more than 84% stocks. It earned slightly higher returns, but its volatility rose sharply:
| Strategy | Average annual return | Volatility (standard deviation) |
|---|---|---|
| Rebalanced monthly | 8.5% | 12.1% |
| Rebalanced annually | 8.6% | 11.9% |
| Never rebalanced | 9.1% | 14.4% |
Source: Vanguard, “Best Practices for Portfolio Rebalancing,” as reported by AAII. Past results don’t guarantee future returns.
The takeaway is that rebalancing isn’t a way to boost returns. It’s a way to stop your portfolio from becoming riskier than you planned.
It enforces “buy low, sell high”
When you rebalance, you trim the assets that have risen the most and add to those that have lagged. That takes emotion out of the decision and stops you from chasing whatever performed best last year.
It keeps your portfolio matched to your life
Your ideal allocation changes as your goals change. Regular reviews are a good moment to check whether your target still fits, not just whether you’ve drifted from it.
How Often Should You Rebalance?
There’s no single “best” frequency. Vanguard found that monthly, quarterly and annual rebalancing produced similar risk-adjusted results, but more frequent rebalancing led to many more trades and higher costs. In one comparison, a monthly strategy with a 1% threshold required 389 rebalancing trades over the period, while an annual strategy with a 10% threshold needed just 15.
Vanguard’s recommendation for most diversified portfolios is annual or semiannual monitoring, with rebalancing when an allocation drifts 5% or more from target. Annual rebalancing is usually the better choice when taxes or trading costs are significant.
There are three common approaches.
1. Calendar rebalancing
You rebalance on a fixed schedule, for example every January or on your birthday, no matter how much the portfolio has drifted.
- Pros: Simple, easy to remember and requires little monitoring.
- Cons: You might trade when it isn’t needed, or miss a big drift between dates.
2. Threshold rebalancing
You rebalance only when an asset class moves a set amount away from its target, such as 5 percentage points.
- Pros: You only trade when it matters.
- Cons: You need to monitor your portfolio regularly, and in volatile markets you may trade more often.
3. Calendar plus threshold (the most practical option)
You check on a schedule, such as every six or 12 months, and only rebalance if something has crossed your threshold. This combines the simplicity of a calendar with the efficiency of a threshold and is what most investors should use.
The 5/25 rule
A popular threshold rule, associated with financial author Larry Swedroe, is the 5/25 rule. You rebalance when an asset class drifts by 5 percentage points or 25% of its target weight, whichever is smaller.
- For a large allocation, the 5-point rule applies first. A 60% stock target triggers rebalancing below 55% or above 65%.
- For a small allocation, the 25% rule applies first. A 10% gold target triggers rebalancing below 7.5% or above 12.5%, because 25% of 10% is 2.5 points.
This stops small positions from drifting too far before you act, while not over-trading large ones.
Ways to Rebalance Your Portfolio
Use new contributions first
The cheapest way to rebalance is to direct new money into the assets that are underweight. You don’t sell anything, so there are no extra trading costs or capital gains taxes. If you contribute regularly, this alone may keep you close to target.
Redirect dividends and interest
Instead of automatically reinvesting dividends into the same holding, send them to whichever asset class is below target.
Sell overweight assets and buy underweight ones
When contributions aren’t enough to close the gap, sell part of the asset that has grown too large and use the proceeds to buy the one that has fallen behind. This is the most direct method, but it can create taxable gains.
Rebalance after major life events
Marriage, a new child, a job change, an inheritance or approaching retirement can all change your time horizon or risk tolerance. These are good moments to review your target allocation itself, not just to rebalance back to an old one.
How Taxes Affect Rebalancing
Selling assets that have gained value can trigger capital gains tax in a taxable account. To keep that cost down:
- Rebalance inside tax-advantaged accounts first. In the US, trades inside a 401(k), traditional IRA or Roth IRA don’t create a tax bill. Other countries have similar accounts, such as ISAs in the UK and RRSPs and TFSAs in Canada.
- Hold assets for more than a year where possible. In the US, long-term gains are taxed at lower rates than short-term gains, which are taxed as ordinary income.
- Know your bracket. For 2026, US long-term capital gains are taxed at 0% for taxable income up to $49,450 for single filers and $98,900 for married couples filing jointly, according to Kiplinger. Investors below these levels may be able to rebalance a taxable account without paying federal tax on the gains.
- Pair gains with losses. Selling a losing position at the same time (tax-loss harvesting) can offset gains from the assets you trim. In the US, watch the wash-sale rule if you buy back the same or a substantially identical security within 30 days.
Tax rules differ by country and change regularly, so check with a tax professional before making large trades in a taxable account.
Common Rebalancing Mistakes
- Rebalancing too often. Frequent trading adds costs and taxes without a clear benefit.
- Never rebalancing. Letting winners run can leave you far more exposed to a market drop than you intended.
- Ignoring costs. Trading fees, fund spreads and taxes can outweigh the benefit of fixing a small drift.
- Rebalancing on emotion. Changing your target because markets are falling or rising is market timing, not rebalancing.
- Forgetting accounts held elsewhere. Look at your allocation across all your accounts, including workplace plans, not each one separately.
FAQs
How often should I rebalance my portfolio?
For most investors, review once or twice a year and rebalance only if an asset class has drifted about 5 percentage points or more from its target.
Is it better to rebalance monthly or annually?
Annually is usually better. Research from Vanguard found similar risk-adjusted results across monthly, quarterly and annual rebalancing, but monthly rebalancing created far more trades and costs.
What is the 5/25 rule in rebalancing?
It means rebalancing when an asset class drifts 5 percentage points from its target, or 25% of its target weight, whichever is smaller.
Does rebalancing increase returns?
Not necessarily. Rebalancing is mainly a risk-control tool. A portfolio that’s never rebalanced may earn more in a long bull market, but it also becomes more volatile and riskier.
Do I have to pay taxes when I rebalance?
Only if you sell assets at a gain in a taxable account. Rebalancing inside retirement accounts, or by using new contributions, avoids the tax bill.
Do target-date funds and robo-advisors rebalance for you?
Yes. Both rebalance automatically to keep the fund or account close to its target allocation.
The Bottom Line
Rebalancing keeps your portfolio’s risk in line with your plan. You don’t need to do it often: checking once or twice a year and acting when an asset class has drifted around 5 percentage points works well for most people. Use new contributions first, rebalance in tax-advantaged accounts when you can, and review your target allocation whenever your life or goals change.
This article is for general information only and isn’t financial or tax advice.
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