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Portfolio & RiskGlossary

Rebalancing

Rebalancing means bringing a portfolio back to its target mix after markets move it. Plain-English definition, a 60/40 example and what to check first.

Also called: portfolio rebalancing, rebalance

By The Token Thesis Desk2 min read3 cited sources

A cairn of balanced flat stones beside the water
“Stacked stones on beach” by DeFacto — CC BY-SA 4.0 (edited: cropped, recolored)

Quick answer

Rebalancing is bringing a portfolio back to its original asset allocation — for example 60% stocks and 40% bonds — after market moves have pushed the percentages away from that target.

What does rebalancing mean?#

Investor.gov defines rebalancing as bringing a portfolio back to its original asset allocation mix. It explains that this is needed because, over time, some investments grow faster than others and holdings may drift out of line with your goals[1]. Your asset allocation is the percentage of your money in each category, such as stocks, bonds and cash.

An SEC publication describes the purpose: rebalancing makes sure your portfolio does not overemphasize one or more asset categories and returns it to a comfortable level of risk[2].

What does rebalancing look like with numbers?#

Worked example

A 60/40 portfolio after one strong year for stocks

Start with $6,000 in stocks and $4,000 in bonds. In a hypothetical year stocks gain 20% and bonds 2%, leaving $7,200 and $4,080 — a 63.83% / 36.17% mix. Selling $432.00 of stocks and buying $432.00 of bonds restores 60/40.

Point in timeStocksBondsMix
Start$6,000.00$4,000.0060% / 40%
After one year$7,200.00$4,080.0063.83% / 36.17%
After rebalancing$6,768.00$4,512.0060% / 40%

Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.

How and when do people rebalance?#

The SEC's beginners' guide describes three ways: sell some of what is overweight and buy what is underweight, buy more of the underweight category, or direct new contributions to it until the mix is back in balance[3]. Some investors rebalance on a calendar, such as every six or twelve months; others only when a weight moves past a limit set in advance[3].

Before trading, the SEC suggests checking whether your method will trigger transaction fees or tax consequences[3]. In a taxable U.S. account, selling at a gain can create a capital gain; rules differ by country.

Where will you see this term?#

You will see it in retirement-plan statements, fund documents and investing guides. For the step-by-step routine and a comparison of calendar and threshold rules, read how portfolio rebalancing works. To choose the target mix in the first place, start with asset allocation basics.

Sources

Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).

  1. 1
    Rebalancing (glossary)U.S. SEC — Investor.gov (n.d.) · Grade A
  2. 2
    Ten Things to Consider Before You Make Investing DecisionsU.S. Securities and Exchange Commission (SEC.gov) (n.d.) · Grade A
  3. 3
    Beginners' Guide to Asset Allocation, Diversification, and RebalancingU.S. Securities and Exchange Commission (SEC.gov) (n.d.) · Grade A

How we checked this note

Every number, date and rule above links to its source. This note cites 3 sources, 3 of them primary (Grade A). Worked examples were calculated in code, and a second editor compared each figure with its source before publishing. Spotted an error? Tell us — corrections are listed on the note. Read our editorial policy.