Rebalancing isn’t just a buzzword, it’s a proven strategy that helps long-term investors stay aligned with their financial goals. At its simplest, rebalancing means realigning the weight of different asset classes in your portfolio.
Markets don’t move in straight lines. Over time, a balanced 60/40 portfolio can drift into 70/30 during a rally or slip to 50/50 in a downturn. These shifts change your risk profile, often without you realizing it. Rebalancing brings your portfolio back to its intended allocation, ensuring your strategy, not market noise, drives your outcome.
Investors should prioritize long-term compounding, prudent risk management, and disciplined execution. Rebalancing reinforces all three. By keeping your portfolio aligned with its target mix, it allows compounding to work steadily without being disrupted by sudden swings in market sentiment. It also acts as a built-in risk control, preventing rallies or downturns from pushing your portfolio into risk levels you never intended.
As your portfolio grows, some assets inevitably outperform while others lag. This natural drift can create unintended risk. For example, if equities surge, they may take up a much larger share of your portfolio than planned, leaving you more exposed to market volatility. Conversely, if bonds outperform, your equity exposure shrinks, limiting growth potential and skewing you away from your intended risk–return balance.
The 2020 COVID-19 market crash offered a clear lesson. Investors who relied on disciplined rebalancing protocols, many through automatic systems, were better positioned for the recovery. By keeping portfolios aligned with long-term goals, rebalancing helped them avoid panic-selling and capture the rebound that followed (Wealthsimple).
Imagine starting with a 60/40 stock–bond portfolio. As markets evolve, stocks surge and grow to 70% of your portfolio. Rebalancing means selling some of those equities and reallocating to bonds, restoring the 60/40 balance.
At the heart of this process are two key benefits:
Together, these two forces, enhancing returns through the rebalancing premium and keeping risk on target, are what make rebalancing the cornerstone of a long-term investment discipline.
So how do investors actually put rebalancing into practice? There are three common approaches, each with its own strengths. The approach you choose should reflect your goals, risk tolerance, and investment style.
The graph below tracks the equity allocation of a U.S. 60/40 portfolio, consisting of the Russell 1000 Total Return Index for equities and the Bloomberg U.S. Aggregate Bond Index for bonds - starting with $10,000 invested in 2019. It compares two rebalancing strategies: annual and threshold-based. The shaded green area marks the acceptable equity allocation range for Threshold-Based rebalancing which is ±5 centered on the 60% equity target allocation (dotted line). The blue line reflects calendar-based rebalancing, which resets the equity weight to 60% at the start of each calendar year. The purple line shows the threshold-based strategy, which only rebalances when equity drift exceeds the 55–65% band. Allocation drift reflects market dynamics, such as the sharp equity drawdown in early 2020 and subsequent rallies.
While the Calendar-based strategy rebalances at fixed intervals (January of each year) , Over the 2019–2025 period, the threshold-based approach triggered only three rebalances, yet remained within the desired allocation band most of the time.
There is no right choice for rebalancing and the decision to choose a particular approach ultimately depends on an investor’s goals, preferences, and comfort with drift and trading frequency.
These methods illustrated above only outline the mechanics of different types of rebalancing strategies, but knowing when to apply them is just as important.
There’s no single “perfect” time to rebalance, but there are a few situations and best practices that can help guide your decisions.
When to rebalance
How to Rebalance Wisely
While rebalancing is widely promoted as best practice, it’s not without trade-offs. For both individual and institutional investors, the key is to understand these costs and manage them effectively.
Rebalancing, then, is neither riskless nor costless. While it remains a cornerstone of disciplined portfolio management, investors, particularly large institutions and those in taxable environments, must carefully weigh frequency, timing, and methodology to ensure the benefits outweigh the costs.
Rebalancing is far more than a mechanical exercise, it’s a vital discipline for staying aligned with your long-term goals. Whether through calendar reminders, threshold rules, or automated platforms, the key is consistency. Making rebalancing part of your routine helps preserve your intended risk profile, capture the rebalancing premium, and ultimately enhance long-term outcomes.