Portfolio rebalancing: when and how to do it
What portfolio rebalancing is, why your mix drifts on its own, how often to do it (calendar, bands or contributions) and what it costs, with an example.
Oct 30, 2026 · 4 min read
You built a portfolio with 60% stocks and 40% bonds. Stocks have a great year and, without you doing anything, you now hold 70% stocks and 30% bonds. Your portfolio is riskier than the one you chose, even though you didn't touch it. Rebalancing means putting things back in place.
What rebalancing is
Rebalancing is selling a little of what went up and buying a little of what went down to return to your target weights.
Following the example, with a 10,000 portfolio:
| Target | After one year | To rebalance | |
|---|---|---|---|
| Stocks | 60% (6,000) | 70% (7,700) | Sell 1,100 |
| Bonds | 40% (4,000) | 30% (3,300) | Buy 1,100 |
| Total | 10,000 | 11,000 | 11,000 |
Illustrative numbers. After rebalancing, you're back to 60/40 on a total of 11,000.
Why it matters
- It controls risk. Without rebalancing, whatever rises most ends up dominating the portfolio. After several good years for stocks, a "moderate" portfolio may have turned aggressive without you noticing, right before a downturn.
- It forces discipline. Rebalancing means selling high and buying low automatically, without trying to guess the market. It's hard to do by instinct, because selling what's winning feels wrong.
- It keeps you diversified. If you chose to invest across several regions, rebalancing stops a single one from ending up as half the portfolio.
Rebalancing doesn't guarantee higher returns. In markets that rise nonstop for years, not rebalancing can earn more, because you let winners run. What it does is keep risk close to what you chose.
The three most common approaches
1. Calendar-based
You check the portfolio every so often (monthly, quarterly or yearly) and bring it back to the target weights. It's the simplest approach. For most people, once or twice a year is enough.
2. Threshold bands
You only rebalance when an asset drifts too far from its target weight, for example by more than 5 points. If the stock target is 60%, you act when it goes above 65% or below 55%. That way you avoid trading on small moves.
3. With new contributions
If you invest money every month, instead of selling you can use contributions to buy whatever fell below target. It's the cheapest approach: no selling commissions and, in many countries, no capital gains taxes.
The costs of rebalancing
Rebalancing too much has costs:
- Commissions on buys and sells.
- The spread between buy and sell prices, which can be high for small ETFs or illiquid stocks.
- Taxes: selling at a gain can trigger taxes, depending on your country.
- Currency conversion: if you invest across currencies, every conversion has a cost.
That's why rebalancing every day or every week almost never makes sense. The benefit of being exactly on target is small compared with the costs.
What the optimizer's backtest shows
In the optimizer, under "Constraints and advanced options", you can choose the backtest's rebalancing: none, monthly or quarterly.
- None: you buy the initial weights and let them run. Weights drift over time.
- Monthly or quarterly: the backtest returns to the optimal weights at the start of each period.
A useful exercise:
- Load the "Global diversified" example and calculate.
- Look at the backtest without rebalancing.
- Switch to quarterly and calculate again.
- Compare total return and maximum drawdown.
The difference in return is often small, but the path is different: with rebalancing, the portfolio usually keeps a risk level closer to what you chose. Remember the backtest doesn't include commissions or taxes.
Common mistakes
- Rebalancing on emotion. Rebalancing means following a rule, not reacting to the news. If you change your target weights every time the market moves, you're not rebalancing: you're speculating.
- Forgetting it entirely. After 5 or 10 years without rebalancing, your portfolio may look nothing like the one you designed.
- Rebalancing too often. More trades mean more costs, without much benefit.
- Never reviewing the targets. Your situation changes: as the date you'll need the money approaches, you may want more bonds and fewer stocks.
Frequently asked questions
How often should I rebalance? For most people, once or twice a year is enough. Another option is to rebalance only when an asset drifts more than 5 points from its target weight. Doing it every month rarely makes up for the costs.
Does rebalancing earn me more? Not necessarily. Its goal is to keep the risk you chose, not to boost returns. In markets that rise for years, not rebalancing can earn more, but with an increasingly concentrated portfolio. We explain why in correlation and diversification.
How can I rebalance without paying taxes? The simplest way is to use new contributions to buy whatever fell below target, instead of selling what rose. Tax rules vary by country; check yours before selling at a gain.
In short
Rebalancing brings your portfolio back to the weights you chose, selling a little of what rose and buying what fell. It's not about earning more, but about keeping risk under control. For most people, reviewing once or twice a year, or using new contributions to correct course, is enough.
Sources and further reading
Try it with your own assets
Build a list and see which portfolio the model calculates, in your currency.
Disclaimer: Educational and simulation tool. It is not investment advice or a personalized recommendation. Past performance does not guarantee future results.