How to Rebalance Your Portfolio and Why It Matters

4 August 2025

Let’s face it—investing isn’t exactly a “set it and forget it” game. Your portfolio is like a garden. You can plant everything perfectly, water it once, then walk away… but before long, the weeds take over. That’s exactly what happens when you don’t rebalance your portfolio. The initial plan goes off the rails, and without regular checkups, your risk, returns, and goals start doing their own thing.

So, what's rebalancing all about? Why does it make a difference? And how do you actually do it without making your head explode?

Let’s break it all down—no fluff, no jargon, just straight-up, actionable info you can use to make your money work smarter.

What Is Portfolio Rebalancing, Anyway?

Imagine setting up your ideal portfolio: 60% stocks and 40% bonds. Solid mix, right? But over time, those stocks might perform like rockstars—suddenly they’re 75% of your portfolio. That sounds like a win... until the market crashes and your “balanced” portfolio takes a bigger hit than expected.

Rebalancing is the process of adjusting your asset allocation back to your original or updated target. It’s like giving your investments a reality check.

In Simpler Terms:

It's like adjusting your thermostat. If it gets too hot or too cold, you tweak it to stay comfortable. Rebalancing does the same thing—but with your money.

Why Rebalancing Your Portfolio Actually Matters

You might be thinking, “If my stocks are doing great, why mess with it?” Fair question—but here's the deal:

1. Keeps Risk in Check

The more stocks outperform, the more aggressive your portfolio becomes. Rebalancing tames that beast. It puts the brakes on runaway risk before it turns into a dumpster fire.

2. Locks in Gains

Ever heard the phrase, "Buy low, sell high"? Rebalancing forces you to do exactly that. You sell the assets that have ballooned (high) and buy more of what’s underperforming but still strong (low). It’s like harvesting crops at the perfect moment.

3. Sticks to the Plan

You came up with your asset allocation for a reason—risk appetite, goals, timeline. Rebalancing helps you stay true to that plan without emotion taking the wheel.

4. Smooths Out the Ride

Markets are moody. Without rebalancing, your portfolio might swing wildly. But keeping allocations tight? That’s like adding stabilizers to a rollercoaster.

When Should You Rebalance?

Okay, so now you’re convinced rebalancing matters. Awesome. But how often should you do it?

There’s no one-size-fits-all answer, but here are a few popular approaches:

✦ Calendar-Based Rebalancing

This one’s simple—pick a schedule and stick to it. Once a year? Twice a year? Quarterly? Doesn’t matter as long as you’re consistent.

Pro: Easy to plan and automate.

Con: Might miss opportunities between set dates.

✦ Threshold-Based Rebalancing

This is the "if it ain't broke, don't fix it" method. You only rebalance when any asset class drifts from its target by a certain percentage—say, 5% or more.

Pro: Reactive to real market changes.

Con: Requires more monitoring and discipline.

✦ Hybrid Approach

Why not both? Some investors set a calendar but only rebalance if the allocation drifts enough. It’s like having a smoke alarm with a battery backup—smart.

How to Rebalance Your Portfolio (Step-by-Step)

Now we’re getting into the meat of it. Here's how to actually pull this off without breaking a sweat.

Step 1: Check Your Current Allocation

Log into your brokerage or use a spreadsheet. See what your current asset mix looks like. Stocks, bonds, real estate, crypto—list it all.

Step 2: Compare to Your Target

Maybe you’re aiming for 70% stocks and 30% bonds. Has your stock portion crept up to 80%? Time to act.

Step 3: Decide What to Buy and Sell

If stocks are overweighted, you'll sell some of those and move that money into underweighted assets like bonds or cash equivalents.

Step 4: Take Taxes Into Account

If you’re rebalancing in a taxable account, capital gains taxes can eat into returns. Consider doing this in your 401(k) or IRA where taxes won’t bite you.

Step 5: Reinvest Dividends and New Contributions

This is a sneaky-good way to rebalance slowly over time without selling anything. Just funnel new money into the asset classes that are lagging.

Pro Tips for Stress-Free Rebalancing

Let’s be honest—nobody wants to check their portfolio every other day. These tips can help you stay on top of your game without losing sleep or sanity.

✅ Automate It

Most robo-advisors and some traditional brokerages let you set up automatic rebalancing. Use the tech—it’s there to keep you from messing things up.

✅ Don’t Overdo It

Rebalancing too often can rack up fees and taxes. Keep calm and stick to your strategy.

✅ Pay Attention to Fees

Watch out for trading fees and bid-ask spreads. If rebalancing costs more than it saves, it’s not worth it.

✅ Watch the Tax Man

If you’re sitting on big gains, maybe it’s time to tax-loss harvest or offset gains with losses elsewhere.

What Happens If You Don’t Rebalance?

Let’s play out the “do nothing” scenario.

You set a 60/40 stock-bond mix five years ago. Stocks have boomed since then, and now your blend is 85/15. You've technically made money—awesome—but you’re shouldering way more risk than intended. If the market tanks tomorrow, your losses could be twice what you bargained for.

It's like driving a car without checking the tires. Sure, it runs—for a while. Then, blowout. Regret. Facepalm.

Real-Life Example: Meet “Smart Sarah” and “Forgetful Frank”

Let’s say both Sarah and Frank invested $100,000 five years ago. Sarah rebalanced annually. Frank didn’t.

Today, Sarah’s portfolio is still aligned with her goals. Frank’s is heavily skewed toward tech stocks… which just took a 30% nosedive. Sarah’s returns are smoother, and she sleeps like a baby. Frank’s having panic attacks every time he hears the word “volatility.”

Moral of the story? Rebalancing works.

Should You Rebalance Yourself or Hire Help?

If you’re a DIY kind of person, go for it. Spreadsheets, financial dashboards, and apps exist to make it easier than ever.

But if the thought of rebalancing makes your eyes glaze over? No shame in hiring a pro. A financial advisor or robo-advisor can keep your portfolio tuned up so you can focus on life instead of spreadsheets.

Bottom Line: Rebalancing Isn’t Sexy—But It’s Necessary

Look, rebalancing isn’t the most thrilling part of investing. It’s not like picking the next Tesla or hitting a crypto jackpot. But you know what it is? Smart. Responsible. Visionary.

It’s the grown-up way to ensure your money keeps working for you in line with your goals and risk tolerance.

So don’t ignore it. Put it on your calendar. Automate it. Do it manually. Call your advisor. Whatever works.

Because in the investing world, staying on track beats swinging for the fences every time.

Frequently Asked Questions

❓ How often should a beginner rebalance?

Once or twice a year is a great start. Don’t overthink it.

❓ What’s the best tool for portfolio rebalancing?

Your brokerage might offer free tools. Otherwise, check out Personal Capital, Fidelity’s Full View, or robo-advisors like Betterment or Wealthfront.

❓ Is rebalancing the same as diversification?

Nope. Diversification is how you spread your investments around. Rebalancing is how you keep that spread balanced over time.

❓ Does rebalancing work in a bear market?

Absolutely. It helps you avoid panic-selling and might even position you to buy undervalued assets while others are running scared.

Final Thoughts

Rebalancing your portfolio isn’t about being brilliant—it’s about being consistent. It keeps your investments aligned with your goals and protects you from unnecessary risk. Whether you DIY or hand off the reins, make it part of your regular investing rhythm.

Got a diversified portfolio? Great. Now do the grown-up thing and rebalance it. Your future self will high-five you later.