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investing 2026-04-16

Portfolio Rebalancing: When and How

Rebalancing controls risk, not returns.

Rebalancing means selling assets that have grown beyond target and buying those that have fallen below. The point is risk control.

Why It Matters

Without rebalancing, a 60/40 stock/bond portfolio drifts to 80/20 during a bull market.

Calendar Rebalancing

  • Annual on January 1 or birthday
  • Semiannual
  • Quarterly (over-trading)
Annual is the most common compromise.

Threshold Rebalancing

Rebalance when any asset drifts more than X%:

  • 5% absolute drift
  • 25% relative drift

Costs

  • Trading commissions: near zero in 2026
  • Taxes: selling in taxable accounts triggers gains
  • Bid-ask spreads

Tax-Smart Order

1. Direct dividends to underweight asset 2. Direct new contributions to underweight 3. Rebalance within tax-advantaged accounts 4. Last resort: sell in taxable

When Not to Rebalance

  • Brand new portfolio
  • Tax cost exceeds expected risk reduction

Automation

Target-date funds rebalance internally. Robo-advisors handle it.

Educational only. Not financial advice.