Rebalancing and drift

Markets push your mix away from its target. Rebalancing brings it back so your risk level stays the one you chose.

Rebalancing Drift Target allocation Tolerance band

What drift is

If stocks rise faster than bonds, stocks become a bigger share of your portfolio without you doing anything. That's drift. A 60/40 plan can quietly become 70/30 — more risk than you signed up for, usually right after a good run when it feels safest.

Ways to rebalance

Calendar: check on a fixed schedule, such as once a year. Bands: act only when an asset class drifts more than a set amount, such as 5 percentage points, from target. Many people combine both.

Methods: sell some of what's overweight and buy what's underweight, or simply direct new contributions to the underweight part, which can avoid selling.

Costs and trade-offs

Selling can create trading costs and, in taxable accounts, taxes. Rebalancing very often adds cost with little benefit; never rebalancing lets risk drift. Rebalancing controls risk; it is not a guaranteed way to raise returns.

Worked example

Bringing a drifted 60/40 back (hypothetical)

Start: $10,000 → $6,000 stocks (60%), $4,000 bonds (40%).
Hypothetical year: stocks +25%, bonds 0%. Now $7,500 stocks, $4,000 bonds = $11,500.
Stock weight = $7,500 ÷ $11,500 ≈ 65.2% — drifted about 5.2 points.
Target stocks = 60% × $11,500 = $6,900. Sell $600 of stocks and buy $600 of bonds → $6,900 / $4,600.
Alternative: send the next contributions only to bonds until the mix is back near 60/40.

Rebalancing turns 'I got lucky' drift back into the risk level you deliberately chose.

Common misconceptions

“Rebalancing means selling your winners, so it lowers returns.”

It trims what grew to restore your chosen risk. Sometimes that helps later, sometimes not. It's a risk-control habit.

“You should rebalance every time prices move.”

Frequent trading adds cost. A schedule or tolerance band keeps it occasional.

Checkpoint