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 →