Rebalancing: What It Is and Why It Matters
Rebalancing is the process of realigning your investment portfolio back to its original target allocation after market movements have shifted it, selling what's grown too large and buying what's fallen behind.
Suppose you set a target of 80% stocks and 20% bonds. After a strong year in stocks, your portfolio drifts to 90/10. You're now taking on more risk than intended. Rebalancing means selling some stocks and buying bonds to return to 80/20.
Without rebalancing, your portfolio gradually takes on more risk during bull markets and becomes overly conservative after crashes. Rebalancing enforces "buy low, sell high" discipline without requiring market predictions.
Two main approaches: calendar rebalancing (review quarterly or annually) and threshold rebalancing (act when any asset class drifts more than 5% from target). Many investors combine both.
Tax implications matter. In taxable accounts, selling to rebalance may trigger capital gains tax. Strategies like rebalancing within tax-advantaged accounts or using new contributions to "buy the laggard" can minimise the tax hit.
Most experts recommend rebalancing once or twice a year — more frequent adjustments rarely improve outcomes enough to justify transaction costs.
Richify Tip
Richify's AI agents monitor your portfolio's drift and flag when rebalancing may be appropriate, helping you stay aligned with your risk strategy without constant manual tracking.
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