Portfolio Rebalancing
The process of buying and selling assets to realign your portfolio with its target allocation.
What You Need to Know
Portfolio rebalancing keeps your risk level consistent over time. As markets move, some asset classes outperform others, causing your mix to drift from the plan you set.
Why Rebalance:
- Maintain your chosen risk level
- Lock in gains by trimming winners
- Add to lagging assets while they’re cheap
- Enforce discipline (rules-based approach beats gut feelings)
Common Rebalancing Methods:
- Calendar-based: Rebalance on a schedule (quarterly or annually)
- Threshold-based: Trade only when an allocation drifts beyond a set band (e.g., ±5%)
- Hybrid: Check on a schedule but act only if thresholds are breached
Tax Considerations: Use tax-advantaged accounts first, direct new contributions to underweight areas, and harvest losses in taxable accounts to offset gains.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/rebalancing
Related Calculators & Tools
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.