Portfolio rebalancing: When and why it matters

You set your portfolio allocation months ago—maybe 60% stocks, 30% bonds, 10% alternatives. You felt good about it. Then the market moved, and suddenly your allocation looks nothing like what you planned. This is where rebalancing becomes essential.

What is rebalancing?

Rebalancing is the process of returning your portfolio to its target allocation by selling overweight positions and buying underweight ones. It sounds simple, but the timing and execution matter more than most investors realize.

Why your portfolio drifts

Markets don't move uniformly. A strong tech rally might push your stock allocation from 60% to 72% overnight. Now your portfolio carries more risk than you originally intended—without you making a single decision.

This drift happens constantly. The longer you go without rebalancing, the further your actual allocation diverges from your target.

When should you rebalance?

There's no single right answer, but two common approaches work well. Calendar-based rebalancing means reviewing and adjusting at fixed intervals—quarterly or semi-annually. Threshold-based rebalancing means acting only when an asset class drifts beyond a predetermined percentage from its target.

Many financial experts recommend a hybrid approach: regular reviews combined with action triggers when drift exceeds 5%.

The tax implications

Rebalancing in taxable accounts can trigger capital gains events. Selling a position that's gained significant value means recognizing those gains and potentially owing taxes. Strategic rebalancing considers these implications, prioritizing tax-advantaged accounts first and using tax-loss harvesting opportunities alongside rebalancing moves.

Emotional discipline is key

The hardest part of rebalancing isn't the execution—it's the psychology. Selling winners feels wrong. Buying into underperforming categories feels counterintuitive. But that's exactly what rebalancing requires: systematically moving against short-term market momentum to maintain long-term strategy.

Let AI handle the complexity

AI tools can track allocation drift in real-time, identify optimal rebalancing opportunities, and factor in tax implications automatically. This removes the cognitive burden and helps you rebalance with confidence and precision.

Rebalancing isn't about predicting markets. It's about maintaining discipline and staying true to your original investment strategy.