Rebalancing
InvestingDefinition
Periodically resetting your portfolio back to its target allocation by selling what's grown and buying what's lagged. Forces you to "sell high, buy low" mechanically — the opposite of what most people do emotionally. Annual or quarterly is common; monthly is overkill.
Rebalancing reduces drift and keeps your risk profile constant, but generates taxable events in non-retirement accounts. In tax-advantaged accounts, do it freely; in taxable accounts, prefer rebalancing via new contributions.
Rebalancing reduces drift and keeps your risk profile constant, but generates taxable events in non-retirement accounts. In tax-advantaged accounts, do it freely; in taxable accounts, prefer rebalancing via new contributions.
Example
Target: 60% stocks / 40% bonds. After a strong stock year, the mix is now 70/30. You sell 10% of stock holdings and buy bonds to restore 60/40. This locks in stock gains and adds to the cheaper asset.
Related tool
Open the backtester tool on Arsenal.finance →