What Is Rebalancing a Portfolio (and How Often Should You Do It?)

Joseph Johnson
Mar 24
4 min read

If you’ve built an investment portfolio, you probably started with a plan: a balance of stocks, bonds, and funds designed around your long-term goals. But markets are constantly moving. Without regular adjustments, your portfolio drifts away from that plan.

That’s where portfolio rebalancing comes in. It’s one of the simplest yet most powerful investment strategies you can use to control risk, stay disciplined, and preserve long-term growth.

What Is Portfolio Rebalancing?

Rebalancing means restoring your portfolio to its original asset allocation.*

Example:

Your target allocation: 70% stocks, 30% bonds.
After a strong stock market rally, your portfolio drifts to 80% stocks, 20% bonds.
To rebalance, you sell 10% of your stocks and buy more bonds to restore 70/30.

This process aims to ensure your portfolio management remains intentional instead of being dictated by short-term market swings.

*Asset allocation does not ensure a profit or protect against a loss.

Why Is Portfolio Rebalancing Important?

Controls Risk – Prevents overexposure to volatile assets like stocks.
Locks in Gains – Takes profits from winners and reallocates to underperforming areas with growth potential.
Forces Discipline – Keeps emotions (fear and greed) from dictating your investment choices.
Supports Long-Term Goals – Keeps your risk profile and returns aligned with your financial plan.

Think of it as financial housekeeping. Left unchecked, your portfolio drifts into something you didn’t plan for.

Rebalancing works hand-in-hand with asset allocation strategies to keep your portfolio aligned with your goals.

How Often Should You Rebalance?

There’s no one-size-fits-all answer, but most advisors recommend:

Calendar-Based: Rebalance once or twice a year (often end of year or mid-year).
Threshold-Based: Rebalance only when allocations drift by more than 5–10% from target.
Hybrid: Review quarterly, act when drift exceeds limits.

The key is not frequency, but consistency.

Case Study #1: The Power of Annual Rebalancing

Imagine two investors, each starting with $500,000 in 2010:

Investor A: Buy and hold, no rebalancing.
Investor B: Rebalances annually to a 70/30 allocation.

By 2023:

Investor A’s portfolio is now 90% stocks, 10% bonds. It grew faster, but carries far more risk.
Investor B’s portfolio has slightly lower growth, but steadier returns and far less risk exposure.

When markets decline, Investor B is better safeguarded — making it easier to stick with the plan.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Rebalanced vs. Non-Rebalanced Portfolio

Factor	Rebalanced Portfolio	Non-Rebalanced Portfolio
Risk Level	Stays consistent (70/30)	Drifts (often 85–90% stocks)
Growth	Steady, long-term	Higher in bull markets, harsher losses in downturns
Discipline	Forces regular review	Portfolio drifts unchecked
Stress Level	Lower — built-in guardrails	Higher — volatility dominates

This is why professional portfolio management almost always includes a rebalancing process.

Portfolio Rebalancing and Risk Management

At its core, rebalancing is a tool for investment risk management. It doesn’t guarantee higher returns — but it keeps you from unknowingly taking on risk that’s inconsistent with your financial plan.

In advanced portfolio risk management, rebalancing is paired with:

Tax-loss harvesting
Diversification across asset classes
Strategic use of ETFs and funds
Alternative investments for stability

Together, these strategies help high-net-worth investors preserve their wealth while still pursuing long-term growth.

Case Study #2: The Emotional Side of Rebalancing

During the 2020 market crash, many investors panicked and sold stocks at a loss. But disciplined investors who rebalanced did the opposite: they sold some bonds (which had risen in value) and bought stocks at lower prices.

By 2021, those same investors enjoyed strong gains. Rebalancing turned volatility into an opportunity rather than a threat.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

When Should You Avoid Rebalancing?

There are times when immediate rebalancing may not make sense:

Large Tax Consequences: Selling appreciated assets may trigger capital gains.
High Transaction Costs: Rebalancing too frequently can eat into returns.
Major Life Changes: Sometimes it’s better to reassess your entire strategy before adjusting allocations.

This is where working with a financial planner helps — rebalancing is done strategically, with tax and cost efficiency in mind.

Putting It All Together

Rebalancing is not about chasing the best returns — it’s about staying aligned with your goals and maintaining a healthy risk profile. Done consistently, it’s one of the most effective investment strategies for long-term financial freedom.

At Sage Hills Financial, we build disciplined, tax-efficient rebalancing into every client’s portfolio management plan, with a goal of ensuring your investments stay on track through every market cycle.

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETS’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.