Lesson 3 of 8
When & How to Rebalance
Keep your portfolio on target without overthinking it
You start with 80% stocks / 20% bonds. After a bull market, you're at 90% stocks / 10% bonds. You've drifted into more risk than you planned for. Rebalancing sells the winners and buys the losers to get back to your target.
Calendar rebalancing
Rebalance on a fixed schedule
Quarterly or annually
Simple and easy to follow
Ignore the noise in between
Threshold rebalancing
Rebalance when an asset drifts 5%+ from target
More responsive to big moves
Slightly better returns historically
Requires monitoring
Check your allocation once a quarter or when markets move big
If any asset class is 5%+ off target, rebalance
In taxable accounts: use new contributions to buy the underweight asset (avoids selling)
In retirement accounts: sell the overweight, buy the underweight (no tax consequences)
Rebalancing bonus
~0.5%/yr
from forced 'buy low, sell high'
Best frequency
Annual
more often has diminishing returns
Drift threshold
5%
before rebalancing
keep it simple
Rebalance once a year on your birthday. That's it. Set a calendar reminder and do it in 10 minutes. Don't check your portfolio in between.
Check yourself
Why is rebalancing in a tax-advantaged account (IRA/401k) easier?