How To Rebalance Your Investment Portfolio


Triston Martin

Oct 24, 2023

Are you looking for ways to realign your investments and ensure they are distributed properly across different asset classes? If so, portfolio rebalancing could be a great option for you. Rebalancing your investment portfolio is an important strategy that helps keep your portfolios in line with the original intentions of the investor while reducing risk over time.

We'll discuss why rebalancing is necessary, key tips on how to do it appropriately, and some helpful resources. Investing can seem like a manageable experience when you're armed with tips on maximizing returns while minimizing risks.

What Is Portfolio Rebalancing?

Portfolio rebalancing is the process of readjusting an investment portfolio to maintain the ratio of investments that have been originally determined. This rebalancing means periodically buying or selling assets in a portfolio to return them to their original target allocation. Rebalancing your portfolio can reduce risk over time by making sure no one asset class becomes overly dominant.

Why You Need to Rebalance Your Portfolio

Rebalancing your portfolio is important to ensure that it remains in line with the original goals of the investor – such as minimizing risk, maximizing returns, and diversifying. Over time, different asset classes can become disproportionately represented in a portfolio due to market movements.

This rebalance is why rebalancing is important; it ensures that investments are adequately exposed to one sector or asset class. Regular rebalancing can help investors take advantage of opportunities when they arise by reallocating funds from underperforming assets into those that may be more attractive.

Methods to Rebalance Investment Portfolio

You can use several methods to rebalance your investments, and which one you choose will depend on the specific goals of your portfolio.

Time-based Rebalancing

A time-based approach involves periodically rebalancing a portfolio after a set period, regardless of whether the asset allocation has changed.

Target Allocation Rebalancing

This method works best for investors who always target a specific ratio or target weighting in their portfolios. It maintains that target weighting through regular buying and selling as market conditions change.

Threshold Rebalancing

A threshold rebalancing strategy might involve setting a maximum deviation from the desired asset allocation and only rebalancing when this threshold is breached.

Regardless of your approach, it’s important to understand the implications of each one and how it could potentially affect your portfolio returns.

When Should You Rebalance?

It is recommended to rebalance your portfolio at least once a year. This allows you to take stock of the investments' performance and make any necessary changes to ensure they remain aligned with the original goals. However, if there are large shifts in asset allocations or market conditions, more frequent rebalancing may be appropriate.

How Do You Rebalance an Investment Portfolio?

Rebalancing your portfolio can be broken down into four steps:


Look at your portfolio's current asset allocation and determine if it still fits with the original intentions of the investor.

Set Targets

Determine what target allocations should be for each asset class within the portfolio.

Adjust Holdings

Make adjustments to bring your actual allocations in line with the desired targets. Adjusting holdings could involve selling some investments, buying others, or transferring money from one account to another.

Monitor Progress

Regularly check up on your investments to ensure they are still in line with the original goals and objectives of the investor.

Ways to Minimize Taxes When Rebalancing

When rebalancing an investment portfolio, it is important to consider how taxes will impact the performance of your investments. There are several ways to minimize taxes when rebalancing a portfolio. First, you should take advantage of tax-advantaged accounts such as IRAs and 401(k)s that allow you to defer or avoid taxes on gains.

Look for opportunities to harvest losses by selling decreased value investments and use them to offset capital gains when possible. Lastly, ensure you understand applicable tax laws and regulations to maximize the benefits of rebalancing your portfolio while minimizing the taxes owed.

Advantages of Imbalanced Portfolio Rebalancing

  • Helps you keep your investments in line with your original goals and objectives.
  • Reduces risk by ensuring no one asset class becomes overly dominant.
  • Allows you to take advantage of opportunities when they arise by reallocating funds from underperforming assets into those that may be more attractive.
  • It can help maximize returns while minimizing risks over time.
  • Permits investors to stay focused on their long-term goals even when market conditions change.
  • Ensures that the portfolio is diversified and properly allocated among different asset classes.
  • It gives investors more control over their investments, allowing them to manage how much risk they are willing to take.
  • Minimizes taxes owed when rebalancing an investment portfolio by taking advantage of tax-advantaged accounts and harvesting losses.

Portfolio rebalancing is an important strategy to ensure your investments stay in line with the goals you had for them originally while also reducing risk over time. It can help investors maximize returns while minimizing risks by reallocating funds from underperforming assets into those that may be more attractive.

Risks of Having an Imbalanced Portfolio

Having an imbalanced portfolio can lead to several risks. Here are some of the most common ones to be aware of:

Higher Risk

An imbalanced portfolio is more likely to be exposed to high levels of risk as it may rely excessively on a single asset class or sector.

Lower Returns

If most of your investments are in one asset class, you may not benefit from diversification and therefore miss out on potential returns from other asset classes.

Poor Market

Tim to poor market timing and missed opportunities for better returns elsewhere.

Increased Volatility

An imbalanced portfolio is more susceptible to large swings in value, resulting in more volatility.

Lower Liquidity

Imbalanced portfolios may need more diversification to convert investments into cash quickly.

Excessive Concentration Risk

Holding too much of one asset class or sector could lead to concentration risk and an inability to weather downturns within that sector or market.

Tax Advantages Missed Out On

An imbalanced portfolio might miss certain tax advantages as it is not spread enough across different asset classes and sectors.

Higher Fees

Finally, investing in only a few funds can lead to higher fees due to fewer options for negotiating lower fees with fund managers.

It is important to remember that an imbalanced portfolio can lead to increased risk, lower returns, and higher fees. Rebalancing your portfolio regularly can help reduce these risks by making sure no one asset class becomes overly dominant.


What is the 5 25 rebalancing rule?

The 5-25 rule is a simplified portfolio rebalancing strategy that involves setting certain thresholds for when to buy and sell assets. The idea is to maintain an asset allocation of at least five percent and no more than 25 percent in each asset class. When any one asset class goes above or below these thresholds, the portfolio should be rebalanced back to its desired target allocations.

Does rebalancing increase returns?

Rebalancing can increase returns by allowing investors to take advantage of opportunities. By reallocating funds from underperforming assets into those that may be more attractive, investors can capitalize on short-term market fluctuations and maximize returns while minimizing risk over time.

Is rebalancing good or bad?

Rebalancing a portfolio can be beneficial, as it helps maintain an asset allocation in line with the original goals of the investor and reduces risk by preventing any asset class from becoming overly dominant. It also allows investors to take advantage of potential opportunities and maximize returns while minimizing risks over time.


After considering your current investments and goals, regular portfolio rebalancing is an important step to help you stay on track. Informed investors know that regular rebalancing can benefit their portfolios in achieving better returns over time while reducing risk. Despite the potential benefits, it is important to remember that actively managing your investments will involve additional costs and may not suit everyone’s needs and goals.


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