Rebalancing: When and How to Bring a Portfolio Back in Line

Why a portfolio drifts from its target mix, the three ways people bring it back, how calendar and threshold schedules differ, and the tax and cost points to check first.

Published by Greg M., Editor in Chief · Updated November 9, 2026

A portfolio set up with a target mix of stocks, bonds and cash doesn’t stay at that mix. Holdings that grow faster take up a larger share, and the portfolio’s risk level shifts with them, often without anyone deciding it should. Rebalancing is the name for bringing the actual mix back toward the target. The SEC’s beginners’ guide defines it plainly: “Rebalancing is bringing your portfolio back to your original asset allocation mix” (SEC, Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing, checked November 9, 2026).

This guide explains why drift happens, the three ways the official sources describe to rebalance, the two common ways to decide when, and the costs and taxes to check before selling anything. It assumes a target has already been chosen; how people approach that choice is in asset allocation by time horizon. The figures in the worked example are invented, and the 60/40 split in it is used only because it is easy to follow, not as a suggested mix.

Why a portfolio drifts

Investor.gov explains that over time “some investments will grow faster than others,” which can push holdings out of line with your goals and “change the risk level of your portfolio” (Investor.gov, Asset Allocation and Diversification, checked November 9, 2026). Its own example is a portfolio that starts 60% in stocks and rises to 80% after market gains.

Drift matters because the target was chosen for a reason: a time horizon, a tolerance for falls, a goal. A portfolio that has drifted toward stocks carries more of the risk of a stock market fall than its owner planned for. One that has drifted toward bonds or cash may grow more slowly than planned.

A worked example with invented figures

Take an invented $100,000 portfolio with a target of 60% stocks and 40% bonds: $60,000 in stocks and $40,000 in bonds. Suppose, in an invented year, the stocks rise 25% and the bonds are unchanged. These are made-up figures to show the arithmetic, not a forecast.

• Stocks: $60,000 × 1.25 = $75,000.
• Bonds: $40,000, unchanged.
• Total: $115,000. Stocks are now $75,000 ÷ $115,000 = about 65.2%, and bonds about 34.8%.

To get back to 60/40 at the new total, stocks would be 60% × $115,000 = $69,000 and bonds 40% × $115,000 = $46,000. The two ways to get there:

• By selling and buying: sell $6,000 of stocks and buy $6,000 of bonds. The total stays $115,000.
• With new money only: keep the $75,000 in stocks and add enough to bonds that stocks fall to 60% of the total. That means a total of $75,000 ÷ 0.60 = $125,000, so bonds need to reach $50,000, a new contribution of $10,000.

The second route avoids selling, but it needs more money, and the bigger the drift, the more new money it takes.

Three ways to rebalance

The SEC’s guide and FINRA describe the same three approaches (FINRA, Asset Allocation and Diversification, checked November 9, 2026):

1. Sell some of what has grown and buy what has lagged. This restores the target in one step, but in a taxable account a sale can create a capital gain, and there may be trading costs.
2. Buy more of what has lagged with new money. No sale is needed, so this route doesn’t by itself trigger a capital gain.
3. Direct ongoing contributions to the lagging classes. Changing where regular contributions go, for a period, lets the mix drift back gradually. It works best when contributions are large compared with the drift.

Many people combine them, using new money first and selling only when contributions alone can’t close the gap.

When to rebalance: calendar or threshold

There is no official schedule. FINRA says as much and suggests considering an annual review (FINRA, above). Investor.gov and the SEC describe two common approaches:

• Calendar rebalancing: checking and rebalancing “at regular intervals, such as every six or 12 months” (Investor.gov, above).
• Threshold rebalancing: rebalancing only when an asset class’s share rises or falls by more than a percentage set in advance.

In the invented example above, a threshold of five percentage points either side of a 60% stock target would mean acting at 65% or 55%. At 65.2%, the stock share has just crossed it. A wider band would mean acting less often; a narrower one, more often.

Both sources add the same caution. In Investor.gov’s words, rebalancing “tends to work best when done relatively infrequently” (Investor.gov, above), and the SEC’s guide says much the same. Frequent trading adds cost and, in taxable accounts, more taxable events. Some people combine the two methods by checking on a calendar but acting only if a threshold has been crossed.

The SEC’s guide also separates rebalancing from changing the target. It says experienced investors “typically do not change their asset allocation based on the relative performance of asset categories” (SEC guide, above). The target changes for reasons such as a shorter time horizon or a change in circumstances; rebalancing just brings the portfolio back to whatever the target currently is.

Costs and taxes to check first

The SEC’s guide says to consider transaction fees and tax consequences before rebalancing, and FINRA lists three specific concerns: sales charges and fees, locking in losses when markets are down, and capital gains taxes in taxable accounts (FINRA, above).

In a taxable brokerage account, selling an investment for more than its adjusted basis produces a capital gain, and selling for less produces a capital loss (IRS Topic 409, Capital Gains and Losses, last updated September 24, 2026, checked November 9, 2026). Under IRS Publication 550, a gain or loss on investment property held more than one year is long-term, and one held a year or less is short-term (IRS Publication 550 (2025), checked November 9, 2026). The two are taxed differently, as how capital gains are taxed explains. Knowing the basis of each lot sold matters too; cost basis and Form 1099-B covers how it’s tracked.

Selling at a loss and buying back something similar can run into the wash sale rule. Publication 550 says that if you sell stock or securities at a loss and, within 30 days before or after the sale, buy substantially identical stock or securities, you can’t deduct the loss at that time; the disallowed loss is added to the basis of the new shares. The rule also covers buying substantially identical stock for an IRA or Roth IRA, and in that case the publication excludes the loss from that basis adjustment (Publication 550, above). Wash sales and tax-loss harvesting explains it in full. How the rule applies to particular trades depends on the details, and a tax professional can confirm it for your situation.

Inside a traditional IRA, trades don’t create a tax bill at the time: Publication 590-A says amounts in an IRA, “including earnings and gains,” generally aren’t taxed until distributed (IRS Publication 590-A (2025), checked November 9, 2026). Roth IRAs and other tax-advantaged accounts follow their own distribution rules, covered in which account does what. This is one reason some people do most of their selling inside tax-advantaged accounts when they hold several kinds of account; which investments sit where is the subject of asset location.

Fees can include trading commissions and a fund’s sales charges, which FINRA names as a cost of rebalancing. Loads, 12b-1 fees and advisory fees covers the charges beyond a fund’s expense ratio. State taxes may also differ from the federal rules described here.

Rebalancing across several accounts

When the same goal is spread across several accounts, the target can be applied to the combined total rather than to each account separately. Adding up each asset class across all of them shows the real mix. FINRA also notes that different accounts can have different targets when they serve different goals (FINRA, above), in which case each one is rebalanced against its own target.

Funds that rebalance for you

Some funds do this job internally. Investor.gov notes that in a target date fund, the fund’s investment adviser “takes care of rebalancing the fund’s asset allocation over time” (Investor.gov, above). A fund’s prospectus describes how and when it does this. Holding such a fund alongside other investments means the overall portfolio may still need checking, since the fund only rebalances what’s inside it.

Common questions

Does rebalancing improve returns? The official sources mainly present it as a way to keep a portfolio’s risk in line with its target. Investor.gov also describes it as cutting back on recent “winners” and adding to recent “losers,” but none of the sources promises a higher return. In a period when one asset class keeps rising, a rebalanced portfolio will hold less of it than an unrebalanced one.

Is there a correct rebalancing schedule? No official schedule exists. FINRA suggests considering an annual review, and Investor.gov describes both six- or twelve-month intervals and percentage thresholds, adding that infrequent rebalancing tends to work best.

Can I rebalance without paying tax? Using new contributions, or making changes inside tax-advantaged accounts such as a traditional IRA, avoids a taxable sale at the time. Selling in a taxable account can create a capital gain or loss. How the rules apply depends on your situation, and a tax professional can confirm it.

What if the drift is small? Many people set a threshold so small movements are left alone, which limits trading costs and taxable events.

Is rebalancing the same as changing my allocation? No. Rebalancing returns to the existing target. Changing the target is a separate decision, usually tied to a change in time horizon, circumstances or goals.

Sources checked November 9, 2026: SEC, Beginners’ Guide to Asset Allocation, Diversification, and Rebalancing (published August 2009); Investor.gov, Asset Allocation and Diversification; FINRA, Asset Allocation and Diversification; IRS Topic 409, Capital Gains and Losses (updated September 24, 2026); IRS Publication 550 (2025); IRS Publication 590-A (2025).