Rebalancing a Portfolio

Say you start with a 70% equity / 30% debt allocation. After a strong equity year, that might drift to 80/20 — you're now carrying more risk than originally intended, simply because equity grew faster. Rebalancing means selling enough equity (and buying debt) to bring the mix back to 70/30, which mechanically means selling some of what just went up.

This is valuable precisely because it removes emotion from a genuinely hard decision. Selling part of a rising asset feels wrong in the moment — most people want to let winners run — but disciplined rebalancing does exactly what a 'buy low, sell high' strategy requires, on a schedule, without needing to predict where markets go next.

A common approach is calendar rebalancing (once or twice a year, regardless of drift) or threshold rebalancing (whenever an allocation drifts more than roughly 5 percentage points from target). Threshold rebalancing reacts faster to large moves; calendar rebalancing is simpler to maintain and generates fewer unnecessary transactions.

One practical detail in taxable accounts: rebalancing by selling triggers capital gains tax. Where possible, rebalancing by directing new contributions toward the underweight asset class — rather than selling the overweight one — achieves a similar effect with less tax drag, though it works more slowly and needs ongoing new money to be effective.