Rebalancing a portfolio means adjusting your investments so they return to a target mix.
Investor.gov, the U.S. Securities and Exchange Commission’s education site, defines rebalancing as bringing a portfolio back to its original asset allocation after market movements push it off target.
This article explains how rebalancing works in simple terms.
It does not tell you what you should do with your own money.
It is general education only and not financial advice.
Why portfolios drift over time
Most investors start with a plan, even a simple one.
For example:
- 60% in stocks
- 30% in bonds
- 10% in cash
That mix is the asset allocation.
Then the market moves.
Stocks may rise during a strong year.
Bonds may stay flat.
Cash hardly moves at all.
After a while, the portfolio might look like this:
- 70% in stocks
- 25% in bonds
- 5% in cash
Nothing “wrong” happened.
Some investments just grew faster than others.
But the risk of the portfolio changed.
It now depends more on stock performance than before.
This natural change is what people call portfolio drift.
Rebalancing is the process that reacts to that drift.
What rebalancing actually means
Rebalancing describes a simple goal:
Move the portfolio back toward a chosen target mix.
Investor.gov explains it this way: over time, some investments grow faster than others, so the portfolio moves away from its original allocation. Rebalancing brings it back in line with that original mix.
Using the earlier example:
- Original target: 60% stocks / 30% bonds / 10% cash
- Current mix: 70% stocks / 25% bonds / 5% cash
Rebalancing would involve steps that reduce stocks as a share of the total and increase bonds or cash as a share of the total, until the mix again looks closer to 60/30/10.
The key idea:
Rebalancing focuses on percentages, not on judging whether a specific stock or bond is “good” or “bad.”
Common ways rebalancing happens
The SEC’s year-end investor bulletin describes three broad ways to rebalance.
1. Sell part of what grew faster
In this approach, an investor sells some of the overweighted assets.
In the example, that would be stocks.
The proceeds then go into underweighted assets, such as bonds or cash.
This moves the mix back toward the original percentages.
It also turns part of the gains in the stronger assets into another type of holding.
2. Add new money to what is behind
Another option uses fresh contributions.
Instead of selling anything, new money goes only to underweighted assets.
For example, new savings might go to bonds and cash until their share returns closer to the target level.
This can move the overall mix without selling existing positions.
3. Redirect income or distributions
Some portfolios generate income, such as interest or dividends.
Investors can direct that cash into the asset classes that fell behind.
All three paths describe the mechanics of rebalancing.
They do not form a rule about which method any person should choose.
How rebalancing connects to asset allocation
Asset allocation sets the target mix of stocks, bonds, and other assets.
Rebalancing is about keeping that target in sight over time.
You can think of it like a thermostat and a heater:
- The thermostat setting is the asset allocation.
- The heater switching on and off is the rebalancing process.
Without rebalancing, a portfolio may drift far from its original design.
FINRA notes that reviewing performance can help investors see when their asset allocation has shifted and when rebalancing might be needed to restore it.
Again, that is a general statement.
It does not tell any individual how often to adjust their own investments.
Why people rebalance portfolios
Educational materials from the SEC, FINRA, Vanguard, and Morningstar repeat one main theme:
Rebalancing focuses on risk control, not on chasing the highest return.
Several reasons often appear in those explanations.
1. Keeping risk closer to the original level
If stocks rise a lot, a portfolio can become more aggressive than intended.
The SEC notes that rebalancing helps prevent a portfolio from overemphasizing one or more asset categories.
By adjusting back toward the target mix, investors aim to bring risk nearer to the level they chose at the start.
2. Maintaining a consistent framework
Vanguard describes rebalancing as an important tool for keeping a portfolio from straying too far from a planned asset mix.
This framework does not predict markets.
It simply tries to keep the portfolio connected to a long-term plan instead of letting short-term performance set the mix.
3. Enforcing discipline
Morningstar’s education pieces often describe rebalancing as a disciplined way to trim assets that have grown a lot and add to assets that lagged.
That discipline may feel uncomfortable, because it often means selling “winners” and buying less popular areas.
Educational materials present this not as a guarantee, but as one way some investors structure their behavior.
Calendar-based and threshold-based approaches
Investor education sites describe two broad ways to decide when to rebalance.
Calendar-based rebalancing
Some investors review their portfolio on a set schedule.
For example:
- Once a year
- Twice a year
- Once a quarter
Investor.gov highlights the idea of periodic reviews so that investors can see whether rebalancing is needed.
This method focuses on time, not on the size of the drift.
Threshold-based rebalancing
Other investors watch for a certain level of drift.
Morningstar and other sources describe examples such as:
- Rebalance if an asset class moves more than a set number of percentage points away from its target.
- Or if the change exceeds a certain percentage of the original allocation.
This method focuses on magnitude rather than the calendar.
Both ideas appear in guides and research papers.
They serve as descriptions of common practice, not as one-size-fits-all rules.
What rebalancing does not guarantee
Rebalancing sounds neat and orderly.
It can be easy to assume it always improves results.
However, major firms and regulators emphasize some limits:
- Rebalancing does not guarantee higher returns.
- It does not prevent losses during market declines.
- It does not remove the risk of investing.
Vanguard research notes that rebalancing may improve risk-adjusted returns in simulations, but it still comes with market risk and no guarantee of meeting any goal.
Investor.gov makes a similar point.
Its materials stress that all investing involves risk, including the possible loss of the money invested.
In other words, rebalancing is a tool, not a shield.
Costs and practical factors
Education resources also mention costs and other practical issues around rebalancing.
Transaction costs and fees
Each trade can involve commissions, bid-ask spreads, or other charges.
FINRA reminds investors that rebalancing, reallocating, and moving funds can create transaction costs that affect results over time.
Taxes
In taxable accounts, selling investments can trigger capital gains or losses.
SEC and FINRA materials often encourage investors to understand the tax impact of their trades, including those linked to rebalancing.
Because tax rules depend on personal details and jurisdiction, official sources usually suggest speaking with a qualified tax professional about specific situations.
Account type and tools
Some investment products and services, including certain funds and automated programs, include rebalancing features.
Investor.gov and FINRA both highlight the need to understand how these tools work, what they cost, and how they handle rebalancing decisions.
Again, these comments describe issues to learn about.
They do not recommend any specific product or service.
Conclusion
Rebalancing a portfolio simply means adjusting your holdings so they move back toward a chosen asset mix after market movements cause drift. Investor education sources like Investor.gov, FINRA, Vanguard, and Morningstar describe it as a way to keep a portfolio’s risk closer to its original design and to maintain a consistent framework over time, while stressing that rebalancing does not guarantee gains or prevent losses.
For someone new to investing, understanding rebalancing adds an important piece to the big picture: asset allocation sets the target, diversification spreads risk, and rebalancing is the maintenance process that keeps the portfolio aligned with that overall plan—without telling anyone what mix they personally should choose.