Get Back in Balance: Why Rebalancing Your Portfolio Matters

What is rebalancing?

Rebalancing means buying or selling investments to bring your current asset allocation back in line with the allocation you want.

Key terms to know

Portfolio

All of your investments together. A portfolio can include stocks, bonds, mutual funds, real estate, digital assets, cash and more.

Allocation

The share of your portfolio in each asset class. If you have $75 in stocks and $25 in bonds, your allocation is 75% stocks and 25% bonds. Learn more about allocations.

Desired allocation

Your target mix, based on your risk tolerance, financial goals and time horizon. Your current allocation can drift away from it. How to choose a target.

Why is rebalancing important?

Rebalancing does two things for you:

1. It keeps your portfolio in line with your risk tolerance and goals.
2. It builds a disciplined habit of buying low and selling high.

1. Staying aligned with your risk tolerance

Different investments grow at different speeds. When one part of your portfolio outperforms the rest, your mix shifts, and you end up taking more (or less) risk than you planned.

Take a portfolio that started 2019 at 50% stocks and 50% bonds. That year, the U.S. stock market gained about 31% and the U.S. bond market about 9%. With no changes, the portfolio ended the year close to 55% stocks and 45% bonds, a more aggressive mix than the plan called for. Rebalancing brings it back to 50/50.

StocksBonds

2. Buy low, sell high, automatically

Rebalancing has a built-in benefit. To get back on target, you trim the investments that have grown the most and add to the ones that have lagged. That means you naturally sell some of what has risen and buy more of what has fallen, without trying to predict the market.

Following a set rule also takes emotion out of the decision. It's much easier to stick with a long-term plan when you aren't deciding on the fly whether to chase a hot market or flee a falling one.

Rebalancing is mainly about managing risk. In a long rising market, a rebalanced portfolio can earn a little less than one left alone, because you keep trimming the winner. The tradeoff is a portfolio that stays at the risk level you chose.