Building a portfolio
Rebalancing
Selling what has grown and buying what has lagged, to return the portfolio to its target mix.
How it works
Markets move weights away from target continuously. Rebalancing restores them, which mechanically means trimming what has done well and adding to what has not.
The main purpose is risk control, not return. Left alone, a portfolio becomes progressively more concentrated in whatever has run hardest, which is usually also whatever is most expensive.
Where it misleads people
Rebalancing too often generates costs and tax without meaningfully reducing risk. Most evidence supports doing it on a schedule — annually — or when a weight moves outside a band, rather than continuously.
Worked example
A 60/40 portfolio after a strong equity year might sit at 70/30. Rebalancing sells enough equities to return to 60/40, restoring the risk level you originally chose.
Related terms
- DriftHow far your actual weights have moved away from the weights you intended to hold.
- Rebalancing bandHow far a holding is allowed to drift from its target before you act.
- Asset allocationHow you divide money between asset classes — the decision that drives most of your long-run experience.
- Capital gains taxTax on the profit made when you sell an investment for more than you paid.
- WeightHow much of your portfolio one holding represents, as a percentage of the total value.
Mentioned in
More in Building a portfolio
- Modern portfolio theory
- Risk tolerance
- Investment policy statement
- Safe withdrawal rate
- Home bias
- Sequence-of-returns risk
- Glide path
- Fund overlap
All 20 Building a portfolio terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.