You set a sensible allocation — say 60% stocks, 40% bonds. Leave it alone for a few years and it won’t stay that way. Rebalancing is how you keep it on track.
Why portfolios drift
Different assets grow at different rates. In a long bull market, your stocks balloon while your bonds plod along — so that tidy 60/40 quietly becomes 75/25. Without noticing, you’re now taking far more risk than you chose, right when the market may be most stretched. Drift works the other way too: after a crash, you can end up too conservative.
What rebalancing does
Rebalancing means periodically selling a little of what’s grown and buying what’s lagged to restore your target mix. Sell some stocks, top up bonds, back to 60/40.
Two benefits:
- It controls risk — keeping your portfolio at the risk level you actually chose.
- It enforces discipline — you’re systematically selling high and buying low, the opposite of the emotional instinct to pile into winners.
How often
You don’t need to do it constantly. Common approaches are on a schedule (once a year) or by threshold (whenever an asset drifts more than, say, 5 points from target). New contributions can also be steered toward the laggard to rebalance gently. The point is to have a rule and follow it.
The takeaway
Portfolios drift as assets grow at different rates, quietly changing your risk. Rebalancing — periodically restoring your target allocation — keeps risk in check and mechanically enforces selling high and buying low. (This is education, not financial advice.)