# How do you rebalance your portfolio?

> Once a year, or when your mix drifts about 5 points, move money back to your target split of stocks and bonds.

Source: https://www.walletprep.com/learn/rebalancing/ · Updated 2026-10-04 · Investing

Rebalancing means moving your investments back to the mix of stocks, bonds and cash you chose, after market moves have pushed it off target. Most people do it once a year, or when a holding drifts more than about 5 percentage points, and they do it inside retirement accounts or with new money to avoid taxes.

## Key facts
- **Your mix drifts on its own.** Different investments grow at different speeds. When stocks rise faster than bonds, stocks become a bigger share of your money, and your portfolio becomes riskier than the mix you chose.
- **There are two ways to time it.** You can rebalance on a calendar, such as every 6 or 12 months, or when a holding drifts past a band you set in advance, such as 5 percentage points. Both work. Picking one and sticking to it matters most.
- **There are three ways to do it.** Sell some of what is over target and buy what is under, send new contributions to what is under, or redirect dividends. The last two avoid selling.
- **Taxes depend on the account.** Trades inside a 401(k), IRA or HSA are not taxed. Selling at a gain in a regular brokerage account creates a capital gain you owe tax on that year.

## Why portfolios drift
Say you choose 70% stocks and 30% bonds. If stocks rise 20% in a year and bonds stay flat, stocks are now a larger slice. In the example below, $14,000 of stocks grows to $18,000 while bonds stay at $6,000, and the mix becomes 75% stocks.
The opposite happens after a stock market drop. Stocks shrink to a smaller share, and you end up holding less in stocks than your plan calls for, right when prices are low.

## How often to rebalance
The SEC's beginner's guide describes two approaches. One uses the calendar: check your mix every 6 or 12 months and fix it. The other uses your investments: act only when a holding moves more than a set amount from its target. It adds that rebalancing tends to work best when done relatively infrequently.
A simple rule combines both. Check once a year, and rebalance only if something is more than 5 percentage points off. Small drifts are not worth the trades, and checking every week makes it tempting to react to news.

## How to rebalance, step by step
Step 1: add up everything you hold across all accounts. Step 2: work out what percentage is in stocks, bonds and cash. Step 3: multiply your total by each target percentage to get the dollar amount each should be. Step 4: the difference between the target and what you hold is how much to move.
To move it, you can sell some of the overweight holding and buy the underweight one. Or, if you contribute every month, send all new money to the underweight holding until the mix is back. If you need to put a lot in to fix it, selling inside a retirement account is usually quicker.

## Keeping taxes and costs low
Do your selling inside tax-advantaged accounts like a 401(k) or IRA, where trades have no tax consequences. Many 401(k) plans also have a setting that rebalances your account automatically once a year or once a quarter.
In a taxable brokerage account, selling a fund that has gained value creates a capital gain. Using new contributions and dividends to buy the underweight holding avoids that. If you must sell in a taxable account, shares held more than 1 year are taxed at the lower long-term rates.

## When you can skip it
A target-date fund or a balanced fund holds stocks and bonds in one fund and rebalances on its own. If that one fund is your whole portfolio, there is nothing for you to rebalance.
Some people also change their target as they age, moving gradually toward bonds as a goal gets closer. That is a planned change to the target itself, decided ahead of time, which is different from reacting to a good or bad year.

## A worked example: a 70/30 mix that drifted to 75/25
Sam chose 70% stocks and 30% bonds and invested $20,000 in his IRA: $14,000 and $6,000. A year later, stocks are worth $18,000 and bonds are still $6,000.

- Stocks now: $18,000
- Bonds now: $6,000
- Total portfolio: = $24,000
- Stock share now: 75%
- Stocks now: $18,000
- Target stocks (70% of $24,000): −$16,800
- Move from stocks to bonds: = $1,200

1. His stock share is $18,000 ÷ $24,000 = 75%, which is 5 points over his 70% target.
2. His target for stocks is $24,000 × 70% = $16,800, so he sells $18,000 − $16,800 = $1,200 of the stock fund.
3. He buys $1,200 of the bond fund, so bonds go to $6,000 + $1,200 = $7,200, which is $24,000 × 30%. It is an IRA, so the sale is not taxed.

## Common mistakes
- **Rebalancing every week.** Frequent trades add costs and can trigger taxes, and small drifts barely change your risk. Once a year, or a 5-point band, is plenty for most people.
- **Selling winners in a taxable account.** A sale at a gain in a regular brokerage account means a tax bill. Rebalance in your retirement accounts or with new money first.
- **Forgetting about other accounts.** Your 401(k) might be 90% stocks while your IRA holds bonds. Judging each account alone can make you think you are off target when your overall mix is fine.

## Questions people ask
### Does rebalancing improve returns?
That is not its job. Rebalancing keeps your risk at the level you chose. In some periods it helps returns and in others it lowers them, for example when stocks keep rising for years. It is about control, not about beating the market.

### Do target-date funds rebalance automatically?
Yes. A target-date fund keeps its stock and bond mix on track and gradually shifts toward bonds as the target year nears. If it is your only fund, you don't need to rebalance yourself.

### Should I rebalance after a market crash?
If your check date arrives, or your mix is outside your band, yes. After a drop that usually means buying stocks at lower prices, which can feel hard. Following the rule you set in calmer times is the point.

### Can I rebalance my 401(k) online?
Usually yes. Most 401(k) websites let you change how your current balance is invested and how new contributions are split. Many also offer an automatic rebalancing setting you can turn on once.

## Do this today
List every investment account and its balance in stocks, bonds and cash. Add the totals and divide to find your current mix. If anything is more than 5 points off target, plan the trade in a retirement account, and set a yearly reminder.

## Sources
- [SEC Investor.gov: Beginner's guide to asset allocation, diversification and rebalancing](https://www.investor.gov/additional-resources/general-resources/publications-research/info-sheets/beginners-guide-asset)
- [SEC Investor.gov: Rebalancing (glossary)](https://www.investor.gov/introduction-investing/investing-basics/glossary/rebalancing)
- [IRS Topic 409: Capital gains and losses](https://www.irs.gov/taxtopics/tc409)

_General education, not personalized financial, tax or legal advice. Figures are examples. Check current rates and limits before you act._