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Adjusting your portfolio back to your target mix of investments.
Why It Matters
Over time, your portfolio drifts from your target allocation. If stocks boom, you might go from 70/30 stocks/bonds to 85/15. Rebalancing means selling winners to buy laggards - counterintuitive but it forces you to buy low and sell high. Most advisors recommend rebalancing annually or when allocations drift more than 5%.
Key Points
- Rebalancing enforces discipline - selling what's up, buying what's down
- Tax-efficient rebalancing: Do it in tax-advantaged accounts (IRAs/401k) to avoid capital gains taxes
- Target-date funds rebalance automatically - one reason they're popular for retirement
Related Terms
Common Questions
Adjusting your portfolio back to your target mix of investments. Over time, your portfolio drifts from your target allocation. If stocks boom, you might go from 70/30 stocks/bonds to 85/15.
Over time, your portfolio drifts from your target allocation. If stocks boom, you might go from 70/30 stocks/bonds to 85/15. Rebalancing means selling winners to buy laggards - counterintuitive but it forces you to buy low and sell high. Most advisors recommend rebalancing annually or when allocations drift more than 5%.
Rebalancing enforces discipline - selling what's up, buying what's down
Tax-efficient rebalancing: Do it in tax-advantaged accounts (IRAs/401k) to avoid capital gains taxes
Target-date funds rebalance automatically - one reason they're popular for retirement