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Rebalancing

In short

Restoring portfolio to target allocations — systematic buy low, sell high

Rebalancing forces you to sell what's risen (expensive) and buy what's fallen (cheap) to restore your target mix. It's systematic discipline — the opposite of the emotional tendency to chase winners.

Portfolio rebalancing restores target asset allocations that drift over time. Threshold-based rebalancing (rebalance when any allocation drifts >5%) balances transaction costs and drift. Tax-aware rebalancing uses new cash and tax-loss harvesting to minimize taxable events.

Related concepts

  • Asset Allocation — Asset allocation is how you divide your money between different types of investments. A classic '60/40' portfolio is 60% stocks, 40% bonds. It's the most important decision in investing — determines most of your long-term returns and risk.
  • Diversification — If you put all your money in one stock and it crashes, you lose everything. Spread it across 20 different stocks, sectors, and even countries — when one falls, others may rise, protecting your overall wealth.
  • Portfolio Rebalancing — If your target is 60% stocks / 40% bonds but stocks rally and become 75%, rebalancing sells some stocks and buys bonds to restore the 60/40 split. It's automatic discipline — sell high, buy low.
  • Tax-Loss Harvesting — If you're up $10,000 on Apple but down $3,000 on another stock, you can sell the loser to offset $3,000 of your Apple gains. You only pay tax on $7,000 instead of $10,000. The IRS lets you use losses to cancel gains.