Why It’s Important to Rebalance Your Portfolio

Nothing in life is certain. And that goes for investing, too.

But you can try to minimize some of that uncertainty by regularly rebalancing your portfolio. 

This involves making periodic adjustments to the assets (stocks, bonds, commodities like gold, etc.) that you have in your portfolio. The aim is to reduce unnecessary risks while still keeping your portfolio aligned with your financial goals.

Asset allocation is one of the most important factors that can determine how well your portfolio performs.

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What Does It Mean to Rebalance Your Portfolio? 

Just like you take your car to the body shop for regular maintenance checks, you want to do the same with your portfolio. Instead of waiting for something bad to happen and reacting to it, rebalancing is a way to pre-emptively mitigate risk by anticipating market volatility.

Rebalancing your portfolio is a process of changing the mix of different assets to ensure that your portfolio aligns with your goals. 

For example, if you allocate 80% of your portfolio to stocks and 20% to bonds, but stocks are outperforming bonds, you can sell some of your stocks and move the funds into bonds, bringing your portfolio back into balance. 

Now, this might sound confusing — why would you sell off high-performing stocks?

Well, if you purchased a stock that is outperforming the market, this could be a good thing in the short term — but it might not be able to retain this level of performance during a market downturn.

Zoom is a great example of an overperforming stock. Thanks to the shift to remote work during the COVID-19 pandemic, Zoom’s stock dramatically increased to a high of $559 per share. Today, Zoom stock is trading in the low $60s. 

Someone who moved some of their Zoom stock into a different asset before the price dropped preserved their capital, while someone who held on to it has had to ride the losses. 

Rebalancing your portfolio helps you recognize when this happens — and allows you to make adjustments — so you can protect your portfolio’s value. To figure out what to buy or sell, periodically check the performance of different assets in your portfolio.

READ MORE: How Much Can I Afford to Invest?

Aggressive vs. conservative portfolios

Depending on your goals, you may want to rebalance with a particular strategy. 

You can create an aggressive portfolio that optimizes for assets that generate high returns, like stocks. Within your stocks, you can allocate even further by choosing a high allocation in growth stocks like Tesla. 

With an aggressive portfolio, you typically look for an asset that will create a profit when it’s sold.

Or you can create a conservative portfolio that protects value. This type of portfolio is usually allocated to more stable assets like government bonds. 

Unlike stocks, bonds are considered fixed-income assets, meaning they hold their value. And because they’re backed by the U.S. government, they’re considered safer than individual stocks.

The type of portfolio you’ll want depends on your personal risk tolerance and the time horizon you’re investing in. 

If you’re young, you might want an aggressive portfolio to capitalize on gains early in your career. But as you get closer to retirement you’ll want a more conservative portfolio.

READ MORE: Long-Term vs. Short-Term Investment Strategies

Importance of Rebalancing a Portfolio

The market is constantly in flux. An investing strategy that worked yesterday might not work tomorrow. Rebalancing helps you anticipate volatility and mitigate it.

Assets come with different levels of volatility, which is why it’s important to diversify. Instead of putting all of your eggs in one basket, a well-diversified portfolio distributes risk across different asset types. 

You’ll want to do this because different variables affect different types of assets. 

Rising interest rates, for example, affect real estate and bonds, but don’t really impact alternative assets like fine art. 

Rebalance for the market

Things can happen beyond your control. But when you diversify, if something happens to the economy or within a specific country, your entire portfolio isn’t exposed — just a part of it.

Tesla is a popular example of a growth stock affected by macroeconomic conditions. Tesla is in a volatile industry that faces competition from traditional car manufacturers and China — geopolitics can affect market conditions just as much as domestic business cycles. 

Rebalance for your goals

It’s not just risk within the market that you’ll want to plan for. Your financial goals will also change over time. 

Even if you don’t plan on retiring for a while, life events like purchasing a home or starting a family will change how much risk you’re willing to take on. You’ll need to make changes to your portfolio to ensure you’re still on track to reach your goals.

Rebalance for your investing style

One last thing to consider is your approach to investing. 

While some investors prefer to buy and hold, you might want to play an active role in managing your portfolio to grow it as quickly as possible. 

While you probably won’t be able to time the market, you can study it and adopt different strategies to grow your portfolio. 

This will require you to rebalance it regularly, so you have enough space to capture gains from high-return assets — like GameStop when it surged in 2021 — without exposing yourself to too much risk.

READ MORE: Active vs. Passive Investing: Which Is Best?

When Should You Rebalance Your Portfolio?

When you first build your portfolio, you’ll define your goals and allocate your assets to align with those goals. After that, set aside some time to periodically review your portfolio.

There isn’t a right or wrong way to rebalance. You can check your portfolio on an annual basis, every six months, or even every quarter. Schedule a recurring appointment on your calendar so you never forget to do it.

Here are some other times when you may want to review your portfolio and possibly rebalance.

Rebalance during major life events

If you experience a major life event that changes your risk tolerance, use that as an opportunity to review your portfolio and rebalance as necessary. 

Things like getting married or purchasing a home often come with months of planning and prep anyway — add a portfolio rebalance to your to-do list.

Rebalance during market volatility

When the market is volatile, you can also use that as an opportunity to check your investments. 

If a downturn is on the horizon, you don’t need to panic and sell off. Instead, you can reallocate your portfolio toward more stable assets.

Rebalance at different ages

When you hit certain ages you’ll want to rebalance your portfolio. 

When you’re 22, for example, you’re likely to have an aggressive portfolio that’s 80-90% stocks and 10-20% bonds. 

But when you turn 40, you’ll be halfway through your career. While you won’t be thinking about retirement just yet, you’ll want to start protecting the value of your portfolio rather than just generating growth. 

As your time horizon shrinks, rebalancing will help you shift your asset mix to more stable assets.

Rebalance for your risk tolerance

You also don’t have to rebalance your portfolio on a particular timeline. You can rebalance based on your current risk tolerance. 

If you are only comfortable having 20% of your portfolio in growth stocks and that changes, you can rebalance when that threshold is crossed. 

This approach will require you to check in with your portfolio regularly but it ensures you’ll stay within your risk tolerance.

How To Rebalance Your Portfolio 

Rebalancing your portfolio will look different depending on your financial goals, risk tolerance, and time horizon. 

With your specific goals in mind, look at the dollar value of your portfolio and determine the asset allocation that aligns with those goals. 

If the value of stocks, for example, is greater than the intended allocation, you can sell some of your stocks to purchase a different asset, bringing it back into balance.

Here are a couple of examples to consider, depending on where you’re at in life.

Example: Rebalancing early in your career

Let’s say Bob is in his early 20s and just getting started with his career. His portfolio is worth $10,000 and is allocated 80% in stocks and 20% in bonds. 

The past year was really good, and his stocks grew by 40% while bonds didn’t grow at all. The value of his portfolio grew to $13,200, with 84% allocated in stocks and only 15% in bonds. 

To rebalance, Bob can sell about $500 worth of stocks and use the funds to purchase bonds. This will bring his portfolio back to an even 80/20 allocation.

Example: Rebalancing mid-career

Alice just celebrated her 40th birthday. She’s thinking about retiring early and wants to rebalance her portfolio, which is currently allocated 60% in stocks and 40% in bonds. 

Like Bob, last year was a great year, and the value of her stocks increased by 40%. 

Of her original $100,000 portfolio, $60,000 was originally in stocks, which has now grown to $72,000. 

Meanwhile, bonds are down, reducing their value to $36,000. Instead of a 60/40 allocation, Alice’s portfolio is about 67% stocks and 33% bonds.

Even though bonds are down, the stock market is highly volatile. What went up last year could go down next year. With early retirement on her mind, Alice wants to preserve capital. 

She sells about $7,000 worth of her stocks to buy $7,000 in bonds, returning her portfolio to a 60/40 allocation. 

READ MORE: Is It Too Late to Start Investing at 50?

FAQs

How often should I rebalance my portfolio?

There isn’t one right time to rebalance your portfolio. It depends on your goals, risk tolerance, and time horizon.

You can create a habit of rebalancing your portfolio at regular intervals — whether that’s annually, biannually, or quarterly. 

Or you can rebalance whenever there is market volatility and you’re concerned about too much risk in your portfolio.

Check your portfolio as frequently as you want. The goal is to make sure it’s balanced so you mitigate risk.

When is the best time to rebalance my portfolio?

The best time to rebalance your portfolio is when you’re about to experience a major life event that will change your risk tolerance. This includes buying a home or starting a family.

You can also rebalance your portfolio when you file your taxes. This will make it a habit and will complement tasks you’re already doing to prepare your taxes.

Do I need a broker to rebalance my portfolio?

You don’t need a broker to rebalance your portfolio but some brokerages provide rebalancing as a benefit.

You can also use a robo-advisor to automatically rebalance your portfolio for you. This is usually done to align with a goal you set when you created your portfolio. 

For example, Webull is a popular investment app for beginners that comes with a “Smart Advisor” that monitors your portfolio and automatically rebalances it to stay aligned with your goals.

Whether you use a financial advisor at a brokerage firm or a robo-advisor, expect to pay a fee to have them rebalance your portfolio.

TL;DR

Each asset class reacts to the market differently. Gold, for example, tends to consistently hold its value over time. Meanwhile, equities like stocks have high growth potential but can be volatile. 

Having the right mix can stabilize your portfolio during an economic downturn while helping you capture growth during corrections.

Your financial situation will also change over time. When you’re young, your portfolio might skew toward high-risk assets. As you get older, you’ll want to rebalance into more conservative assets like bonds to protect your portfolio’s value.

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