What drifts
Suppose you wanted 70% stocks and 30% bonds. After a strong stock year you might sit at 78/22 without making a single new purchase. Your risk quietly rose. Rebalancing is the act of trimming what grew overweight and topping up what lagged — back toward the targets you chose on purpose. Drift is silent; that is why it needs a rule.
Why this matters
Rebalancing enforces “buy low, sell high” in a mechanical way: you sell a bit of the winner and buy a bit of the laggard. It also keeps risk aligned with the plan. Skip it for years in a roaring bull market and you may discover your “balanced” portfolio became a stock bet right before a decline. The discipline feels awkward in the moment and wise in hindsight.
Calendar vs threshold
Calendar: review once or twice a year and reset. Threshold: rebalance when a holding drifts by a set amount (for example, 5 percentage points). Both work if you actually follow them. Mixing constant tinkering with no written rule usually becomes emotional trading.
In tax-advantaged accounts, rebalancing is cleaner. In taxable accounts, prefer directing new contributions to the underweight side before selling and realizing gains. New cash is often the cheapest rebalancing tool you have.
Example
Target 60/40. Stocks rally; you are 68/32. You sell some stock fund shares (or buy bonds with new cash) until you are near 60/40 again. Feels odd to sell winners. That discomfort is often the discipline working — the same muscle that stops you from doubling down only because something already went up.
Watch out for
Rebalancing into a concentrated idea that lagged because the business is structurally broken — “laggard” is not always “opportunity.” Also over-trading: weekly rebalancing of tiny drifts mostly creates costs and noise. A rule should keep risk honest, not give you a hobby.
Pair it with the plan
Rebalancing assumes the original targets still match your life. Job loss, a nearer house purchase, or a windfall may justify changing targets. Do that consciously. Do not let market moves change targets by accident — that is drift wearing a decision costume.