Rebalancing Your Portfolio: When and How Often?
Rebalancing means bringing your portfolio back to the mix of stocks and bonds you chose, after market moves have pushed it off course. Most people should do it about once a year, or whenever a holding drifts more than about 5 percentage points from its target. Rebalancing is a risk control, not a return booster: in 98 years of data, a 60/40 portfolio left alone earned more than one rebalanced every year, but only because it slowly turned into an almost all-stock portfolio. Here is the evidence, the two main methods, and how to do it without a tax bill.
The Short Answer
- How often: once a year, or when an asset class is more than about 5 percentage points away from target (for example, stocks above 65% in a 60/40 plan). The SEC notes that rebalancing "tends to work best when done relatively infrequently."
- Why: to keep your risk where you set it. A 60/40 mix started in 1996 and never touched was 90% stocks by the end of 2025.
- What it costs: some return in rising markets. From 1928 to 2025 an annually rebalanced 60/40 portfolio returned 8.3% a year; the untouched one returned 9.5%, with a worst year of −35.5% (2008) against −27.3%.
- Cheapest way: rebalance inside a 401(k) or IRA, where trades are not taxed, or steer new contributions toward the asset that is under target.
What Rebalancing Is
The SEC's example: you start with 60% of your portfolio in stocks, and after a good run in the market it has become 80%. To return to your original mix, you sell some stocks, buy other assets with new money, or both. That means trimming whatever has done best and adding to whatever has lagged, which is uncomfortable but is the point: it stops one good run from deciding how much risk you carry.
How Far a Portfolio Drifts
| End of year | Stock share of a 60/40 portfolio started in January 1996, never rebalanced |
|---|---|
| 1999 | 76.4% |
| 2007 | 68.1% |
| 2008 | 53.0% |
| 2013 | 70.9% |
| 2021 | 84.3% |
| 2025 | 90.0% |
Left alone, the portfolio was three-quarters stocks going into the 2000 crash and dropped to 53% stocks at the bottom of 2008, exactly when stocks were cheapest. By 2025 it held 90% stocks. Someone who chose 60/40 because they were five years from retirement would have been carrying far more risk than they signed up for.
Does Rebalancing Raise Returns?
| Period | 60/40 rebalanced yearly | 60/40 never rebalanced | Stocks at the end, never rebalanced |
|---|---|---|---|
| 1928-2025 | 8.3% a year; worst year −27.3% (1931) | 9.5% a year; worst year −35.5% (2008) | 99.6% |
| 1976-2025 | 10.0%; worst −18.0% (2022) | 10.9%; worst −27.2% (2008) | 95.5% |
| 1996-2025 | 8.3%; worst −18.0% (2022) | 8.8%; worst −18.5% (2008) | 90.0% |
| 2006-2025 | 8.2%; worst −18.0% (2022) | 8.8%; worst −18.0% (2022) | 87.3% |
Over long periods in which stocks beat bonds, the portfolio you leave alone earns more, because it ends up mostly in stocks. Rebalancing gives up some of that to keep the risk you chose: the rebalanced 60/40 never lost more than 27.3% in a year, while the drifting one lost 35.5% in 2008. If you want the higher return, the honest way to get it is to pick a higher stock allocation on purpose, not to let drift choose it for you. See how to choose an asset allocation.
How Often: Calendar vs. Threshold
| Method | How it works | Good for |
|---|---|---|
| Calendar | Check and rebalance on a set date, such as every 6 or 12 months | Simplicity; pairs well with an annual review or tax season |
| Threshold (bands) | Rebalance only when an asset class drifts past a set band, such as 5 percentage points | Fewer trades in calm years, faster action after big moves |
| Hybrid | Look at set dates, act only if a band is breached | Most people who manage their own portfolio |
| Automatic | A target-date fund or robo-advisor does it for you | Hands-off investors; see target-date funds |
The SEC describes both approaches: some experts suggest regular intervals "such as every six or 12 months," others a rebalance whenever a holding moves more than a pre-set percentage. Checking much more often than that mostly adds trades and, in a taxable account, tax.
Taxes and Costs
- Inside a 401(k) or IRA, selling and buying funds does not create a tax bill. Do as much of your rebalancing there as you can; see the 401(k) guide and traditional IRA guide.
- In a taxable account, selling a winner realizes a capital gain. Rebalance with new contributions and dividends first, and sell only what you must.
- Trading costs: many brokers charge no commission on online stock and ETF trades, but check for mutual fund transaction fees and bid-ask spreads.
- Use the whole household: treat all your accounts as one portfolio, holding bonds where trades are tax-free and rebalancing there.
How to Rebalance, Step by Step
- Write down your targets, for example 60% U.S. and international stocks, 40% bonds.
- Add up every account and work out today's percentages. A portfolio tracker does this automatically.
- Compare with your bands. If nothing is more than about 5 points off, stop.
- Fix it the cheap way first: point new contributions and dividends at whatever is below target.
- If that is not enough, trade inside tax-advantaged accounts, selling what is over target and buying what is under. Broad ETFs or index funds make this a few trades.
- Write down the date and do it again in a year, or sooner if a band is breached. Research tools such as stock analysis tools are not needed for any of this.
FAQ
How often should I rebalance my portfolio?
Once a year is enough for most people, plus any time an asset class drifts more than about 5 percentage points from its target. Rebalancing much more often adds trades and taxes without much benefit.
Should I rebalance during a market crash?
If your bands are breached, yes: it means buying stocks after they have fallen. A 60/40 portfolio started in 1996 had drifted down to 53% stocks at the end of 2008; rebalancing then meant buying near the low.
Does rebalancing improve returns?
Not usually over long periods in which stocks beat bonds. From 1928 to 2025 a never-rebalanced 60/40 portfolio earned 9.5% a year against 8.3% for an annually rebalanced one, but it ended almost entirely in stocks and had a worse worst year. Rebalancing is about keeping the risk you chose.
Is rebalancing taxable?
Not inside a 401(k), IRA or other tax-advantaged account. In a taxable account, selling investments at a gain is taxable, so rebalance there with new money where you can.
Do target-date funds rebalance automatically?
Yes. The fund's manager keeps the mix on target and shifts it toward bonds as the target year approaches.
Sources
- SEC Investor.gov, Asset Allocation, Diversification, and Rebalancing
- Aswath Damodaran, NYU Stern, Historical Returns on Stocks, Bonds and Bills: 1928-2025 (January 2026 update). All backtest figures are our calculation from this data.
This article is for general information and is not investment or tax advice. Backtests use index returns, which exclude fees and taxes; past results do not predict future ones. Figures calculated on 2026-10-23.
