What Is Rebalancing, and When Should You Do It?

A strong month in the market can throw your portfolio off just as easily as a bad one. When stocks climb, they can grow into a bigger share of your account than you meant to hold. When they drop, the balance doesn’t look like the number you were counting on. Either way, your mix has drifted from the plan you set. Rebalancing is how you bring it back.

Rebalancing investments means bringing your portfolio back to its target mix of stocks, bonds, and cash by trimming what’s grown and adding to what’s lagged behind. The exact trigger and timing matter less than having a plan and following it. That’s true whether the market just handed you a win or a scare.

What Is Rebalancing?

Say your plan calls for 60% stocks, 30% bonds, and 10% cash. If stocks climb and grow to 70% of your account, rebalancing means selling some of those stock holdings and buying bonds until you’re back near your original split.

If your money sits across a 401(k), an IRA, and a taxable brokerage account, no single statement shows you the combined mix. Each provider only sees what it holds. Seeing your total allocation across every account in one view is the step that has to happen before you can rebalance anything with confidence.

The Benefits of Rebalancing: Protecting Gains and Controlling Risk

Rebalancing investments protects the gains you’ve already made and keeps your risk at the level you chose, even after the market moves things around. When a stock or fund grows well past its target share, selling part of it locks in that gain instead of leaving it exposed to the next downturn. It also gives you a system to follow when markets get emotional, so you’re acting on a plan instead of a headline.

How Often Should You Rebalance Your Portfolio?

Most people check their mix monthly, quarterly, or once a year. What matters more than the exact cadence is picking one and sticking with it.

Checking too often invites a nervous reaction to normal market noise. Checking too rarely lets your allocation drift further than you’d want before you notice. A quarterly or annual check works well for most retirement portfolios, frequent enough to catch drift, spaced out enough to avoid overreacting to a bad week.

Time-Based vs. Threshold-Based Rebalancing: Which Method Fits You?

Time-based rebalancing means adjusting on a fixed schedule. Threshold-based rebalancing means waiting until an asset class drifts a set amount, often 5%, from target.

Vanguard’s research on portfolio rebalancing found that checking once or twice a year and rebalancing at a 5% threshold gives most investors a solid balance between managing risk and keeping trading costs down. That’s why a lot of advisors blend the two methods instead of picking just one.

Method	How it works	Best for	Watch out for
Time-based	Rebalance on a fixed schedule, like every quarter or once a year	Anyone who wants a simple, predictable routine	Missing a big drift that happens between check-ins
Threshold-based	Rebalance whenever an asset class moves a set amount, often 5%, from target	Anyone who wants to react to real movement, not the calendar	Requires closer monitoring to catch the trigger
Blended	Check on a schedule, but only trade if the threshold is also crossed	Most retirement investors, per Vanguard’s research	Takes a bit more tracking than either method alone

Rebalancing in a Volatile Market: What to Sell, What to Hold

Markets recover faster than most people expect, and selling into a downturn usually locks in a loss instead of managing risk.

Don’t panic when markets drop

History offers some reassurance here. After the S&P 500 bottomed out on March 9, 2009, it climbed about 68% over the following year, and the Dow gained roughly 61% in that same stretch. Investors who sold near the bottom missed almost all of that recovery. The 2020 crash followed a similar pattern: the S&P 500 rallied more than 51% from its March low to hit a new record high within five months. Rebalancing works best when you give it room to work, not when you’re reacting to a headline.

Have big winners? Consider selling some

If a stock or fund has grown well past its target share, selling part of it while it’s up means following the plan you set before emotions got involved. Reinvest what you sell into whatever’s fallen below target, often a low-cost index fund, to bring your mix back in line.

You don’t have to rebalance your entire portfolio in one move, especially when markets feel uncertain. Selling and reinvesting a portion, then waiting a week or two to see how things settle, gets you most of the way there without betting everything on one moment.

Rebalancing an IRA or 401(k): What’s Different

Inside an IRA or 401(k), you can sell and buy without triggering a tax bill, which makes rebalancing there simpler than in a taxable account.

Log into your provider’s portal and compare your current mix to your target. From there, you can redirect where new contributions go, exchange funds to close the difference right away, or turn on automatic rebalancing if your plan offers it.

If you’re juggling more than one account, this is where it gets tricky again. Rebalancing your 401(k) to its own target doesn’t guarantee your overall mix across every account is where you want it. A 401(k) at 60% stocks and an IRA at 60% stocks can still add up to a combined allocation that’s off, depending on the size of each account.

Your brokerage or plan custodian can often help too. Many offer free rebalancing tools or a quick call with someone who can walk you through it. For a more personal read on your situation, a CERTIFIED FINANCIAL PLANNER® through Boldin Advisors can help you set a strategy and stick to it.

Use Rebalancing to Make a Tax Move

Rebalancing gives you a natural trigger point for two tax moves: a Roth conversion, or harvesting a loss in a taxable account.

Consider a Roth conversion

If you’ve been weighing a Roth conversion, doing it while the market is down means you’ll pay tax on a smaller balance today. When the account recovers, that growth comes back to you tax-free.

A few things worth knowing before you convert. The move is permanent. The Tax Cuts and Jobs Act of 2017 eliminated the option to reverse a Roth conversion, so once it’s done, it’s done. A larger conversion can also push up your Medicare Part B and Part D premiums a couple of years later, so check where that threshold sits before you convert. And make sure you can cover the tax bill from money outside the account you’re converting. Paying it from the IRA itself shrinks the balance you’re trying to grow tax-free.

You can model a few different conversion amounts and see the tax impact before you commit, using the Boldin Planner.

Harvest tax losses in a taxable account

In a taxable account, selling a position that’s down can offset gains elsewhere, and up to $3,000 of ordinary income if you don’t have enough gains to offset. Rebalancing gives you a reason to look at what’s underperforming and decide whether it’s worth harvesting the loss while you’re already making changes.

Automate Rebalancing So You Don’t Have to Remember

Many 401(k) plans and brokerages let you turn on automatic rebalancing once, so you’re not relying on memory or willpower every quarter.

It’s worth revisiting your target allocation every few years too, since your goals, income needs, and comfort with risk shift as retirement gets closer. The plan you set at 45 probably isn’t the plan you want at 62.

The real risk to any rebalancing strategy is letting a bad week talk you out of the plan you made on a calm one. A written plan gives you something to return to when the market gets loud.

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FAQ: Rebalancing Investments