What Is Rebalancing?
Rebalancing means resetting your portfolio back to your planned mix after markets have pushed it off course.
A simple example
You plan 60% stocks and 40% bonds. After a great year for stocks, you are at 70% stocks and 30% bonds. To rebalance, you sell some stocks and buy bonds until you are back at 60/40.
Why rebalance
Without it, your portfolio slowly gets riskier than you planned. Rebalancing also makes you sell what has risen and buy what has fallen, which is the opposite of what fear and greed tell you to do.
How often
Once a year is enough for most people. Another approach is to rebalance only when your mix drifts more than about 5 percentage points. Adding new money to whatever is below target is a tax-friendly way to rebalance.
Watch the costs
Selling in a taxable account can trigger capital gains tax. Rebalancing inside retirement accounts like a 401(k) avoids that in the US.